Business Breakdowns
· 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?
· Daniel Wu
[00:00:00] S1: I think the key lesson from Meli that could be applied as a lens when looking at other businesses is just the power of reinvestment and reinvention. Meli started life as an auction marketplace, quickly introduced fixed-price sales to expand that market, and then invested in payments and logistics to solve customer pain points and that unlocked further growth. Then the company completely reinvented itself after nearly two decades in existence by introducing free shipping. At the time, the financial performance of the business didn't suggest that such a drastic change was necessary, but Marcos Galperin went ahead and did what was best for the customer anyway, and that free shipping reinvention had a dramatic and negative impact on operating margins. And yet investors were willing to look past that because of the long-term growth runway that it unlocked. There's probably some pattern recognition there from Amazon as well, but I think it still required very solid execution by management to pull it off for investors. I'd say also that it's important to basically find and back an exceptional management team and one that's focused on seizing the multi-year opportunity rather than managing the business to near-term expectations. I don't know if Meli was ever objectively cheap, at least in the time that I've been following it, but shareholders have certainly done very well by paying a fair price and just letting Galperin and his team execute against the long-term vision.
· Matt Reustle, Daniel Wu
[00:00:00] S0: Fascinating. Well Daniel, this has been extensive and in areas deeper than we'll typically go, but I enjoyed every second of it, so thank you very much for sharing the knowledge. [00:00:00] S1: Thanks for having me on. It was good fun.