Business Breakdowns
· Daniel Wu
[00:00:00] S1: So I think the key risk is just around that international competition, particularly from Shopee, which we've already discussed. So I won't touch on that again, but I would just say this is probably more limited to Shopee specifically, because if you look at Amazon, I mean, Amazon's been a very early mover into LatAm and it didn't really catch on anywhere except Mexico. And then for Temu, I believe they made a splash when they launched in Brazil last year. But as a cross-border e-commerce player, I think it's very hard to really compete with the local players on any meaningful metric, whether it's delivery speed or service experience or even product quality in Temu's case. So really the only thing that Temu has going for it is just a very, very, very low price. And Shopee is also a strong player in that lower price segment. So it's hard to see Temu having a real relevant market within Brazil where it can actually attack. And I think the same could be said for Mexico as well. I mean, we saw Temu launch in Mexico and there was a spike in downloads and MAUs, and that's come back pretty quickly as soon as they stop advertising and doing their user acquisition as well. In terms of the other risks, I think there's a few other risks that are worth touching on. Firstly, there's the saturation of digital payments in Brazil. So back in November 2020, the Brazilian central bank launched Pix, which is a 24/7 instant payment system that's operated by the central bank. And that's just been an absolutely massive success. So today over 90% of personal consumption expenditure has been digitalized. And as a result of Pix, card payments have lost significant share in Brazil. But credit card volumes have still grown on an absolute basis and at a pretty healthy double-digit rate as well. So it's mainly been debit cards that have lost share, both as a percentage and in terms of dollars. The other thing I'd say is that in the long run this might even be a tailwind for credit card adoption because once the underbanked individuals are pulled into the digital banking system via Pix, it becomes much easier for them to graduate onto credit cards, where most of the value lies for the fintechs that offer them. The second risk is that there's occasional regulatory rumblings in the payments industry.
· Daniel Wu
The Brazil Central Bank has been toying with aligning the credit card settlement period to international standards. And there's also further regulation being touted for the extremely high rates of revolving credit card balances. We think these changes would fundamentally alter the business models of all the parties that are involved in the payment system. And also not necessarily for the better, because I think most of these changes will result in lower consumption expenditure from consumers. So these regulatory proposals haven't really gained that much traction. And then finally, I think it's worth mentioning that there is some antitrust litigation happening in Argentina where a consortium of banks has sued Meli for monopolizing the country's digital payments market. And then Meli has countersued, alleging that the banks have formed a cartel. So we would say that it's pretty hard to argue against Meli being a monopoly in Argentina given its 80% share of e-commerce and probably more or higher share in the fintech space. But it's not really clear to us who is being hurt by this. And then on top of that, there's President Javier Milei who disdains excessive regulation. So it's also not clear what the regulators would actually do if Meli lost. So those are the risks that I would highlight. Obviously, anyone investing in EMs, you're going to face typical EM macro risk and also FX risk as well. And particularly for LatAm, I think that FX piece you just have to be mindful of because some of these currencies can devalue pretty quickly and pretty steeply and it distorts the reported results for Meli. And you have to just, I guess, dig a level deeper to understand how the business is performing. Because for example, if GMV growth is 20% in USD, but then 80% in FX-neutral, then you'd argue that the 20% USD growth is not really reflective of the underlying business and that you should look at the 80% FX-neutral growth. But on the other hand, that 80% FX-neutral growth, how much of that is coming from the fact that say, Argentina is inflating at 50% a year or Brazil inflation is at 14%? It does mean that it is harder to track the underlying performance of the business. And that's why I've referred to a few times the growth in units sold for the marketplace because that's probably the best metric for underlying growth of the marketplace business.
· Matt Reustle
[00:00:00] S0: Yeah. Incredibly difficult to isolate the variables. I think we touched on it early. But the execution is incredible just in terms of how they've been able to evolve. And you mentioned Marcos Galperin as the leader here. What else, if anything, would you reference just in terms of the culture and leadership that went into executing on what is an academic case study of learning from some of the other businesses around the world and applying it with your own unique approach?
· Daniel Wu
[00:00:00] S1: For any founder-led company, ultimately the culture is going to be largely a manifestation of the founder's own personality and beliefs. Marcos Galperin has described the company's culture as one of a professional sports team. Now unfortunately, I think that's become a bit cliche now after Reed Hastings popularized that metaphor. But I believe Galperin did almost become a professional rugby player. So there's some merit to that metaphor. He's described the culture as a very competitive meritocracy with a long-term focus where people are incentivized to take risks because everyone wins or loses as a team. And that willingness to serve, sacrifice short-term profits in pursuit of long-term objectives is largely born out of surviving the dot-com bust and then having to build out piece by piece all the vertical components required to scale e-commerce in Latin America. And that's why there's such a big focus on technology as well, because Meli has basically needed to build its own solutions to a lot of the problems and the frictions that it's encountered. As a matter of fact, the company's mission statement is to democratize commerce in Latin America through technology. And then if you just look at the broader leadership team, Galperin has definitely fostered a very long-tenured and talented group of executives. Many of the C-suite have been with the company since the start and departures have typically been succeeded by internal promotions. And I think this level of leadership continuity is not only good for maintaining long-term strategic focus, but is also good for the culture of the organization as well. The last thing that I'd say on the leadership topic is that earlier this year the company announced a leadership transition. So after 26 years, Marcos Galperin is stepping back as CEO and assuming an Executive Chairman role. Ariel Szarfsztejn, who is currently the President of Commerce, will be promoted to CEO starting next year. Ariel has been running the commerce business since 2022. So I think the fact that the commerce segment has delivered very strong performance compared to global peers coming out of that Covid boom is a strong testament to his capabilities.
· Daniel Wu
And as a matter of fact, Marcos Galperin hasn't spoken on an earnings call for five years and if you listen to Ariel talk about the business and field Q&A, you would think that he was actually the CEO. I think it's also interesting that it was the Commerce President rather than the more experienced fintech president who was promoted to CEO. And that suggests to us that the long-term opportunity for the company is still centered around the Mercado Libre marketplace. And then just onto your outlook question in terms of the qualitative outlook for Meli. So I'd say we're very positive on it. The e-commerce penetration across Latin America is still relatively low and we think that can support double-digit market growth for the long term. And then you add on top the potential share gains by Meli as well and then the take rate expansion from value-added services and it's plausible that the Commerce revenues will continue to grow above 20% for the foreseeable future. On the fintech side, payments related revenue likely decelerates going forward given the digital payment saturation in Brazil and the dominant position already achieved in Argentina. But Mexico is still a growth market for them. In fact, I think Mexico cash usage for consumer purchases is still in the 40% range. We also expect that the revenue mix will continue to shift towards credit, particularly as the credit card business continues to scale in Mexico and also launch in Argentina. And then just on operating margins, we would expect that the margins continue to expand on a long-term view, though that won't necessarily be linear given management's preference to reinvest in the business to extend its growth runway. But structurally speaking, the penetration of advertising and logistics monetization in the Commerce segment and the continued improvement of credit card NIMs in the fintech segment should be long-term tailwinds for margin expansion and also for earnings growth.
· Matt Reustle
[00:00:00] S0: This has been fascinating. Daniel, there's a lot of things that I look forward to reading more about after this discussion, but we close these conversations out with the lessons that you can take from this particular business and potentially apply elsewhere. What would stand out the most to you about Meli?