TIP859: Mercado Libre ($MELI): We Doubled Down on Meli w/ Daniel Mahncke & Shawn O'Malley

Daniel Mahncke and Shawn O’Malley return to Mercado Libre (NASDAQ: MELI), a holding in The Intrinsic Value Portfolio. The “Amazon of Latin America” just reported its 31st consecutive quarter of revenue growth above 30%, a streak no company of its size has ever matched, with revenue up 45% to $10.75 billion. In the same quarter, its operating margin fell to 6.3%, the lowest in years, and the stock trades below where it was originally pitched. Daniel and Shawn cover the evolution of Mercado Pago, which processed $109 billion in payments last quarter, more than four times what the marketplace sold, and runs a $17.9 billion credit book growing 62% a year that has made it the sixth-largest card issuer in Brazil. They explain why booking losses on new credit cards upfront is the biggest reason margins fell, and why Pago is so important for the ecosystem. They then take a close look at Shopee, the biggest competitor for Meli in Brazil. They also cover Amazon, and the question that decides the whole thesis: will Brazil end up looking like the U. S., with one or two dominant platforms, or like China, where four players compete margins down to 2%? In the end, they walk through the updated valuation model and explain why they added to the position. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:02:04) What changed since our last pitch (00:05:57) How Mercado Pago keeps taking share (00:07:25) Why Pago strengthens the flywheel (00:21:48) Whether competition forces Meli’s hands (00:44:29) How margins impact the Meli thesis (00:51:08) What MELI’s stock is worth (00:57:13) Whether MELI will stay part of The Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Apply for The Intrinsic Value Mastermind Community where investors learn, share ideas, network, and join calls with experts. Apply for The Mastermind Inner Circle to connect with the most successful investors, executives, and business leaders from our audience. As an Inner Circle Member, you also have the opportunity to join us at a private dinner with Markel CEO Tom Gayner in March! Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠Submit Tool⁠. Our Original Mercado Libre Episode. Check out the Sea Limited Episode. Check out the Grab Episode. Mercado Libre Investor Relations. Dive into our previous Intrinsic Value breakdowns Uber, Nike, Reddit, Nintendo, Airbnb, AutoZone, Alphabet, Ulta, John Deere, Madison Square Garden Sports. Follow Daniel on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and LinkedIn. Follow Shawn on ⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. 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• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors Podcast, episode 859. And in our last episode, Sean, I pitched McDonald's to you, which is one of the best known brands in the world, but it is also currently in a historic drawdown, despite the business still doing quite well. Today's company is far less known globally, although I would say that investors all over the world know it quite well.

• 0:23Speaker 02

  And most people probably know it as the South American Amazon. And we already know from your original episode that there is some truth to that, but they also differ in some pretty important aspects.

• 0:34Speaker 01

  They do, but I like it as much, maybe even a bit more than Amazon. It's not as safe of a bet, but the payout might be even better. And speaking of which, today, we want to take another look at what happened to MercadoLibre. That's the company we discussed since we last pitched it and since we also added it to the portfolio. And we just want to see how the thesis has been playing out.

• 0:54Speaker 02

  And we just increased the weighting of MercadoLibre in our intrinsic value portfolio from five to seven percent. And we did that in one of our recent livestream portfolio reviews, which you can find the link to in the show notes below. But that now makes MercadoLibre our fifth largest position. So it's a perfect time to revisit the thesis.

• 1:17Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manca.

• 2:04Speaker 02

  What's interesting is that MercadoLibre has been your starting point to cover really a whole number of e-commerce companies. And of course, you pitched Amazon as your first, but I think Melly gave you a different appreciation for really the flywheel effect of marketplaces, especially when combined with payments, credit, and logistics, and advertising, and all these other things. And after Melly, you covered C Limited, which I believe also made it into your personal portfolio. And then there's another company, Casby, which I think might have also made it in your personal portfolio.

• 2:36Speaker 01

  Yeah, I think it's safe to say I very much like how these businesses work together and also reinforce each other. And yes, I do own C Limited in my personal portfolio. I looked very smart when I first bought it at about $70 and then went up to $130. So I thought this is a fantastic investment. Now I gotta say it's back in the seventies. So I don't look as smart anymore. And I haven't yet bought Casby, but I might eventually do so too, because it's a fantastic company. And we will actually talk to management and our community soon. So the last couple of questions that I have, we might be able to ask them at that point. And then Amazon, which is another one of those companies, to me, is just a bit of a different business, primarily because you don't have the same flywheel effects, because the marketplace is just not as connected to the other parts of the business. So Amazon's

• 3:17Speaker 01

  flywheel is primarily based on Nick Sleep's concept of scale economies here, the model that we often discussed in the past.

• 3:25Speaker 02

  Well, sort of the mythology behind the idea of the flywheel is that it was actually written down on a napkin by Jeff Bezos in the early days of Amazon. And I don't know, is that even true?

• 3:35Speaker 01

  That's how the legend goes. You know, I see these photos. I don't know if they're actually 100% accurate. And whenever I hear about something written down on a napkin, I immediately think about Messi. That story might not land as well with our North American listeners, but back when a young Lionel Messi, who is the best football player of all time, and I don't go into any debate about that, he was trying out at Barcelona's legendary youth academy. And the scouts there were so impressed, they wrote basically the first contract of Messi on a napkin to make sure that there is no other team snapping him up, because he was still looking out for some other teams in Spain. And that napkin was actually sold at an auction, I think just a couple of years ago, for about $1 million. But that's a totally different story. I sometimes digress talking about football.

• 4:15Speaker 01

  Back to Amazon and its self-reinforcing cycle. So the entire idea is that Amazon uses cost savings derived from obviously scale to then lower prices, which improves convenience for people who buy there. And then also they invest that money into logistics, which then again leads to faster shipping and it just a much better offering for other people buying on Amazon. And then in turn, that attracts more shoppers and more shoppers also lead to more volume and then obviously scale. And that is how you have this flywheel starting to spin.

• 4:43Speaker 02

  And then from the merchant side, high traffic on Amazon attracts outside merchants and brands to offer their products in Amazon and use their logistics network for fulfillment. And the more merchants Amazon attracts, the better the variety of products, and then the better the prices become because of increased competition. And thus, it becomes more valuable for buyers again. And it really is one of the most beautiful flywheels out there, perhaps rivaled only by our favorite Uber.

• 5:12Speaker 01

  Well, there's not one episode where we won't talk about Uber. It doesn't matter which company we actually cover. I would actually argue, though, it gets a bit more beautiful. And that's when you combine that marketplace flywheel we just talked about with payments and credit. I know you don't like payments standalone, but here, I think it's quite powerful. So Amazon basically depends heavily on advertising dollars. And as we've talked about plenty of times recently, that business seems at least much more uncertain than, let's say, six months ago. And Melly's profit driver comes from its payment and credit arm, so not yet from advertising. I would say that advertising is still a great opportunity for them, but there's no dependence on that yet, at least not to the same extent as Amazon is experiencing it. And I don't see how payments or credit would be disintermediated through AI or agents. And in fact, it might yet actually turn into another advantage, looking out for the next

• 5:57Speaker 01

  five to 10 years.

• 5:58Speaker 02

  It comes with its own risk, but perhaps we start there just because it is such an important topic for Melly. And so let me ask you, I mean, has anything changed in terms of how you think about MercadoPago or MercadoCredito and the Melly thesis here?

• 6:14Speaker 01

  That was a very good pronunciation. I almost thought you were Brazilian for a moment here. But I would say if anything, I'm just more bullish. But just to give some background, especially for listeners who didn't listen to the first episode. So MercadoPago and MercadoCredito are why they're so powerful for the flywheel, right? So what MercadoPago is doing, it's basically the payments arm for MercadoLibre. And people often compare to PayPal. I think we might need to choose something else eventually as a comparison, since that might not be a compliment for much longer. Maybe it has stopped being a compliment for quite some time already.

• 6:43Speaker 02

  PayPal.

• 6:44Speaker 01

  PayPal, you know, that's not what you want to be compared to, I think, if you're a striving business as MercadoPago is. And basically what they do is they make money through online checkout and QR codes and so forth. And they also have these point of sales devices in physical stores. It's a very small part of how they actually make money, but at least they get some dominant market share in parts of the market that they don't have on the marketplace. So on MercadoLibre. And what they do is that they take a small fee per transaction. And now we actually see that MercadoPago processes more volume of Melly's marketplace than on it. And I think that's a very important step in the evolution of MercadoPago, because initially it was created to basically enable more people to order online on MercadoLibre. So it was a clear extension of the marketplace flywheel.

• 7:27Speaker 01

  But so you had buyers in Latin America that didn't trust the product would actually arrive. And then sellers didn't trust that they would actually get paid when they sent out the product. So then pago basically sat in the middle and held the money until both sides were happy.

• 7:40Speaker 02

  And MercadoPago could offer great deals for shoppers. So it made a lot of sense for MercadoLibre customers to use MercadoPago. And pago customers in turn shopped more often on MercadoLibre because of the offer. So it was a great engine for customer lock-in. And then with scale, pago also turned into a really important data aggregator. And so a seller who lives on Melly gets paid through MercadoPago. And once Melly knows how much that seller sells, how seasonal their businesses, and how reliably they ship their products, it can offer them a working capital loan to help them buy more inventory. And the seller uses that loan to stock up and sells more on MercadoLibre. And then the data gets better, and then you have more supply, and it lowers prices. And it's all, again, part of this

• 8:24Speaker 02

  flywheel that is very, very strong for MercadoLibre.

• 8:28Speaker 01

  And on the buyer's side, when, for example, you get checkout, Melly can offer you a MercadoPago credit card or even an installment plan right there, which in Brazil, that's how a lot of people pay with using these installments whenever they check out. And that offer directly improves conversion, obviously. And then more conversion means more GMV. And then more GMV means you get now even more data than you had before. And the data makes the next credit decision even better. So then basically, the customer acquisition engine is driving down in costs, where in the end, your customer acquisition cost is essentially zero. And by now, MercadoPago is the sixth largest credit card issuer in Brazil. And as you said, so-called ecosystem customers, so basically customers that use pago and MercadoLibre instead of just one of them, generate about 70% more GMV than

• 9:11Speaker 01

  someone who only shops on MercadoLibre, and about 90% more payment volume than someone who only uses MercadoPago. So the share of those users, the ones that use both, has actually increased eight percentage points since the end of 2023. And that's the flywheel of pago of the marketplace and on the marketplace.

• 9:29Speaker 02

  Well, you mentioned GMV. And so just to clarify, it stands for gross merchandise value and refers to everything sold on the platform, all the transaction, the total transaction value of the commerce that MercadoLibre facilitates, not necessarily the revenue that it takes. And another term that we're going to be using a lot today is flywheel. And I think we might even use it at a record-breaking rate. It seems like we can't stop saying it.

• 9:53Speaker 01

  We might, but I would say it's not our fault. MELI is just incredibly good at building them. And perhaps you can call it a mix of a network and scale effect for the part outside of the marketplace. So how Pago basically works off the marketplace is that you have a small shop in, for example, Sao Paulo or Mexico City, that puts a MercadoPago point-of-sale device on the counter or just prints a QR code. And MELI actually has a lot of these devices. Again, they don't make a lot of money from it because it's a very low-margin business, but it helps them expand the business. So for example, in Mexico alone, you have 1.4 million of these devices. And now that those shops' sales basically flow through MercadoPago, MELI can also lend to a merchant that has never sold anything on MercadoLibre because it still sees all the shop's actual daily revenue. And then, once you, as a consumer,

• 10:37Speaker 01

  pay at your local corner store with MercadoPago, it only makes sense for you to also keep money in the wallet because MercadoPago is actually paying your return. And that matters a lot, especially in these countries where usually inflation is quite high and it's where your savings. And it's also why assets under management are now $23 billion. And that's up almost 70% in a year. So incredible growth there at basically every part of the business. And again, once your money's in the app, you basically pay your bills through it, you send money to friends, and you also use the card for things that have nothing to do with e-commerce. So imagine groceries, maybe gas, or just going out regularly.

• 11:11Speaker 02

  And I think the data advantage of the off-marketplace use is that MercadoLibre now has a complete picture of someone's financial behavior. And so we talked about how people are more likely to repay MELI loans because they don't want to lose access to the MELI ecosystem, which is really essential to everyday life in some ways. But with the off-marketplace data, MELI can now also spot when consumers are more cautious with their spending with unrelated merchants. And that's really crucial to doing better underwriting, which helps make credit cheaper overall and safer to offer. And then that can bring in more users and around and around the flywheel we go.

• 11:49Speaker 01

  There it is again, the flywheel. But this is actually something that we saw at an even more extreme level at Caspi, where Caspi is so entrenched in the everyday life of people in Kazakhstan, that the first loan they would pay back is always Caspi's because they can't afford to lose access. Because there you also talk about all these government services that basically run through the app. And you can see that in numbers when, for example, you're checking how many loans they would cover even after no payments have been made in 90 days. Usually, that number is incredibly low. It has been quite high, at least relative for Caspi. And if MELI ever comes close to that, I think that would be the ultimate bull case. But that's unlikely, given that I don't ever see them reaching super app status. And I also don't think they would need that. So the numbers already show how strong this

• 12:30Speaker 01

  second flywheel is. For example, the marketplace sold about $22 billion of goods last quarter. MercadoPago processed about $101 billion of payments. So payment volume is more than four times the size of the marketplace. And MercadoPago has 88 million monthly active users. That's roughly the same as the 89 million people who bought something on MercadoLibre in the last quarter. And again, we're always talking about all that growth. This one is growing 30% a year. So fintech is already 43% of revenue, excluding currency effects, and it grew even faster than commerce in each of the last three quarters. And that's why I don't think it's actually crazy to say that MercadoPago could one day, and maybe that day is not even that far away, be bigger than MercadoLibre, the legacy business, basically.

• 13:14Speaker 01

  We've seen this before, by the way. PayPal was spun out of eBay in 2015, and the payments company ended up being far more valuable than the marketplace that created it. Now we see how their market cap slowly, unfortunately, go down and narrow in terms of the gap there. And then even Alibaba's Ant Group was said to have the largest IPO in history in 2020, before Chinese regulators pulled it. So I don't think MELI would ever spin off MercadoPago. But then again, C Limited just announced plans to spin off money, which is their payments arm. So you never really know. And I'm actually quite interested to hear what they will say about that going forward. Because to me, it makes sense to raise money, to grow the book. But if they lose any of the synergies between the marketplace and the payments arm, I think that would be a big negative, in my opinion.

• 13:58Speaker 02

  The difference with PayPal is obviously that MercadoLibre has this massive lending business, and they lend to both consumers and merchants. And the credit portfolio is growing fast. It was $16.5 billion at the end of June, up 75% year-over-year. And in January, we said it had been compounding at 80% to 90% a year for five years. So it's still growing at similar rates despite having this much bigger base. And in the second quarter alone, MELI put $2.1 billion of new money into it. And you always want to be careful when credit portfolios are growing that fast, but especially so when it happens with South American consumers, where the market there just tends to be a bit riskier for lenders.

• 14:39Speaker 01

  The markets are definitely less stable, and the lending business is called MercadoCredit just to say it once again. And it's become a major profit driver for MELI, especially in recent years. And it's not a new business unit. So MELI first started underwriting loans in the mid-teens, I think it was 2016. And then they quickly followed up with consumer loans. So they first started loaning money to merchants, and then they went into consumer loan, which is how a lot of companies do it, also the ones that we covered. So they basically have a track record already of lending money for about a decade. And merchant loans, again, are pretty safe bet to start off, which is why so many companies start out with them. Even GrabDit, which is a company that we discussed in a prior episode, it was you actually who covered the company. And if you're a seller on MELI, and for example, you need inventory for Black Friday, which is coming up, a bank would ask for collateral and probably

• 15:24Speaker 01

  years of tax returns before they would actually give you a loan. MELI, on the other hand, they know exactly how much that seller sold last Black Friday, and how often customers actually come back, and then also how reliably they ship. So it can basically offer a short working capital loan, and then collect the repayment straight out of the seller's future sales on the platform because they go through MercadoPago. So the risk is pretty low because MELI has the best information possible, and also controls the cash flows. And basically, that's how the loan gets repaid.

• 15:53Speaker 02

  The focus now is on the consumer side in credit cards, though, is my understanding. They're almost half the entire lending book. And MELI keeps issuing effectively 2.5 to maybe 3 million new credit cards each quarter, which is just insane. And as you said earlier, MercadoPago is now the sixth-largest credit card issuer in all of Brazil, which is a huge market.

• 16:17Speaker 01

  Sometimes the numbers are so big that I just have to Google if they actually make sense. 2.5 to 3 million credit cards per quarter. That's just an insane amount. But you know, these are the numbers that a company like MELI can pull off because they just operate in one of the biggest markets in the world, which is why we find that they have incredible tailwinds, which is why we like to invest in them. You just mentioned that with the shift, basically the mix shift to credit cards, it's also the reason for why the margins have shifted. And we will get to that. But the difference between the merchant loans and the consumer loans through credit cards is especially the time horizon. So a merchant loan is usually quite short. MELI sees the merchant sales, and it pays back within months. A credit card is obviously a sort of revolving line to a consumer with a long tail. And the only thing that MELI sees is that person's behavior. So that's

• 17:02Speaker 01

  still a lot of data, more than a bank sees, but it's also a different kind of risk compared to these merchant loans. And on the accounting and margin front, what changes is that when MercadoPago issues a new card, it has to book the expected losses over the upcoming period for that card more or less on day one, while the interest income from the card comes in at lag. So if you grow a card book slowly, you would barely notice that. But if you grow at 90% a year, you're recognizing losses on millions of cards that haven't earned anything yet. So basically, your reported profit looks worse the faster you grow it, even if every one of those cards is profitable over its lifetime, at least potentially.

• 17:39Speaker 02

  And MELI's cards are very profitable, we've found, once they mature. The card portfolio as a whole is still loss-making. Its net interest margin after losses was minus 2.5% last quarter versus roughly break even a year earlier because card issuance had accelerated. But management says a cohort of cards reaches break even within about 12 to 18 months. And as a result of the Q4 results, about three-quarters of the Brazilian card book had already reached that point. And the estimates are that the card business will lose a bit less than $450 million in operating profit this year. And that will break even by 2028. And then it should earn around $1.5 billion a year by the end of the decade. And obviously, that

• 18:24Speaker 02

  also depends on this continued growth on the credit card side of things. So the bull case for credit really is that today's losses are tomorrow's profits, right? And the bear case is that those losses aren't just timing, but they're really structural issues for the business model. So how would you say we tell the difference between those two things?

• 18:44Speaker 01

  Well, what you usually do is you look at the loans that go bad, not the provisions, which is basically the money that is booked as losses upfront. So the metric is the non-performing loan ratio. You check two points in time usually. So there are loans that are 15 to 90 days late, and that's essentially your early warning sign. And then there are loans that are late more than 90 days, which in most of the cases, that means they're gone. So the 15 to 90 day ratio was about 7% in Q2, down from 8% in Q1. So there was slight improvement there. And then for cards specifically, it's only about 4.5%, which the company says is close to an all-time low. So despite 75% growth, credit quality hasn't deteriorated, at least in the early buckets. And then the 90-day plus NPLs, they did move up slightly.

• 19:27Speaker 01

  So they went from 17.5% to 18.5%. So you also saw loss provisions for the Brazilian consumer go up earlier this year since Meli stretched, and I think this is what we discussed in the latest update, the length of the personal loan from five months to eight months to reach new customers. And that already normalized in Q2, but it definitely does show that the book does react when they push into these new segments of customers.

• 19:50Speaker 02

  And they're really doing this at a pretty tricky moment, honestly. According to Brazil Central Bank, household delinquency hit 6% in August, which is up more than a percentage point in a year. And across the whole financial system, delinquency is at its highest level since 2011. So Meli is trying to grow its card book 90% year over year into what is really the worst Brazilian consumer credit environment we've seen in 15 years.

• 20:16Speaker 01

  But isn't it kind of reassuring how well they are holding up? And also the fact that you can follow the numbers so well and just see how they change within just a quarter and what Meli can do to change and basically adjust to what the numbers are telling them. Maybe that's just me showing my confirmation bias here. Maybe it's a bigger risk than I portrayed as here. But up until now, the book has never been through an actual Brazilian recession of significant size at least. And Meli does resolve heavily, as we just said. So the allowance for credit losses is $4.5 billion against $16.5 billion for the entire book. So more than a quarter of the portfolio is already set aside for potential losses. And they're also adding lower risk products. So I do expect the book to get less risky over time, the more it's maturing, basically.

• 20:59Speaker 01

  So in July, MercadoPago started offering payroll loans to private sector workers in Brazil, where repayment basically comes straight out of the borrower's salary. And they signed, I think, 5,000 contracts in the pilot for just the first four days. And again, while MercadoPago takes more risk per loan than, for example, another portfolio company of ours, which is New Bank, it does get paid roughly twice as much as New Bank. So the net interest margin after losses across the entire book was 21% in Q2, lower than the 23% a year ago, because cards are having a bigger share of the book now, but it's still a very profitable lending business.

• 21:35Speaker 02

  Well, I'm still glad to hear that they're de-risking the portfolio from credit cards because I think I would rather have less margin with much less risk of a significant blow up occurring.

• 21:46Speaker 01

  I'm with you on that. I think we discussed the sort of bad asymmetry of having such a finance business. So the less risk there is, the better it is for the business.

• 21:53Speaker 03

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• 25:00Speaker 03

  All right, back to the show.

• 25:02Speaker 02

  Well, I think we're agreed on that. So let me ask you about just the competitive front. I mean, you also own C Limited, as we talked about. I take it you believe that Shopee, which is a subsidiary of C Limited, can be successful in its expansion in Brazil and South America too? Is that right?

• 25:21Speaker 01

  Well, again, I bought C in the 70s per share. So I thought at that point it was just an incredibly cheap stock. So I don't think you need Brazil to succeed in a way that they would actually replace Meli as the number one. I think that's definitely not my base case. It's not actually my bull case for C Limited or Shopee, at least not in Brazil. So the good thing is, I'm saying this somewhat jokingly, that this is also an emotional hedge for me, where Meli's a much larger position. So while I want C to perform well, if it doesn't, at least in Brazil, that means at least a competitor's struggling. So jokes aside, I feel like C Limited keeps performing well fundamentally. And I do believe that the South American e-commerce market, and this is what we said in our original pitch, is probably big enough for two or three players.

• 26:02Speaker 01

  So it's expected to grow roughly 11% a year over the next decade, mostly driven by higher e-commerce penetration. As I said in the original episode, e-commerce penetration in Latin America is only around 14% to 15%. In the US, you see that roughly 25%. The UK is actually close to 30%. And China, unsurprisingly, is well above 30%. So usually, I would say that you can blindly compare such rates just across countries and even continents. But in this case, I believe Latin America, and especially the big markets like Brazil, Argentina, and Mexico, which are the biggest ones for MercadoLibre too, I think they have all that it takes to reach those levels of e-commerce penetration too.

• 26:41Speaker 02

  We're definitely seeing a wave of digitalization in all of those countries, especially in the financial system, which is why we like MercadoLibre and also New Bank. And you have this really young and tech-savvy generation in this part of the world. And countries like Brazil also have a lot of money by global standards. Brazil's GDP per capita is about $10,000 to $11,000 US dollars. And just for context, in many Southeast Asian countries, that number's closer to $5,000. So the average Brazilian, at least in GDP terms, is effectively twice as wealthy.

• 27:14Speaker 01

  And it took a while for private companies like Meli to build out the logistics and the payment systems to even enable e-commerce. So the infrastructure wasn't there as it was in the US and Europe. So obviously, there was a time lag that they basically had to close, and that was the private sector, not the public sector. But we all say this basically to show that the market is big enough to have multiple players grow profitably for a long time. And that said, obviously, the economics are better, the more concentrated the market is. And the two competitors we're talking about, I think, especially when it comes to competing with Meli on the big scale, are C Limited and Amazon. Although I personally consider C to be the fiercest competitor. So for anyone who missed our C Limited episode that we also did, the short version is C Limited has three businesses.

• 27:56Speaker 01

  So they have Garina, which is a gaming company, and they have this one massive hit, which is called Free Fire. And that's an evergreen game that is their cash engine, and also their engine to expanding into different and global markets. Then you have Shopee, which, as you just alluded to, is the e-commerce marketplace of C Limited, which is especially dominant in Southeast Asia, but it has also expanded successfully into Brazil. And then you have Money, which is their fintech arm. So they basically compete with Meli in Brazil, in e-commerce, fintech, and also in lending.

• 28:26Speaker 02

  The really impressive part is that they built a substantial logistics business and delivery network in Brazil in just a couple of years. And since Amazon, we've always had this belief that logistics is a huge moat. But C really showed that, hey, with perfect execution and some investment, it can actually be recreated and copied much faster than most people would have thought possible.

• 28:50Speaker 01

  Shopee definitely outperformed all the expectations I had for them just a couple of years ago. Also, as I said, you didn't have the same infrastructure as India. So basically, you expected the moat to be an even bigger one for MELI because they had to build the logistics all by themselves. And now you had a player coming in that is using a lot of third parties and is basically creating a pretty good experience itself. And it's not easy to imagine how the two would coexist without constantly being a threat for each other. I hear a lot of MELI boards somewhat neglecting Shopee as a player for mainly the lower end of the market because of MELI's GMV dominance. You know, MELI's GMV is still about two and a half times higher than Shopee's GMV, despite Shopee now being on par and even slightly ahead when it comes to the total amount of items sold

• 29:32Speaker 01

  in Brazil. And I don't think you can view Shopee as a low-end commerce place. I think they have already been successful at expanding into higher-end products in other markets through what they call Shopee Mall. And that's basically where they partner with these high-quality brands in all kinds of industries. And Shopee Mall has more than doubled in the first quarter and is now about 15% of Shopee's Brazilian GMV. And that obviously helped increase its average order value in Brazil, too, where Shopee now signs deals with major electronic dealers in Brazil to offer more electronics on its site, which is a typical product, as we also discussed with some of these other companies that we looked at in the e-commerce space. It's a critical product to attract higher-quality customers. And just like MercadoLibre, Shopee expanded into pharmacy after Brazil's health

• 30:14Speaker 01

  regulator lifted a 2022 ban so licensed pharmacies can now sell medicines on platforms like Shopee and MELI.

• 30:22Speaker 02

  So you can see how they're continuing to clone the Amazon playbook, right? You can get prescriptions delivered through Amazon. Surprisingly, that's the one thing I don't get delivered through Amazon. But Shopee, in its own right, launched a loyalty program called Shopee VIP, and it's priced at exactly the price of MELI's basic tier, but it offers free shipping on orders above 10 reais, while MELI's free shipping starts at 19 reais. And so for context, 10 reais, the conversion rate on that is about $2 US. So it's a 5 to 1 ratio. And that's a pretty attractive offering, which is why it has already gained

• 31:03Speaker 02

  a million users in just the last six months. And for context, though, MELI does not disclose its subscriber numbers, but estimates are around the sort of 12 to 15 million range. And they're still growing 70% year over year. So I expect the gap to remain pretty material going forward. I'm not too worried about it.

• 31:23Speaker 01

  I'll be surprised if it closes meaningfully, but average order value is an important metric, for me at least, that I track to see whether Shopee will gain significant share among higher-end customers in Brazil, or better said, whether customers will choose Shopee for those purchases in the future, because many customers are already using both apps. So they use MELI and they use Shopee, and then MELI usually for the high-quality and the high-trust products, and Shopee for the lower tier of the market. But again, I don't think that's where Shopee has to be for the entirety of their presence in Brazil.

• 31:53Speaker 02

  What I do like is that MELI is not only trying to defend the upper market, but also the lower end of things, so that they don't just lose those customers to Shopee. And then sort of the innovator's dilemma where Shopee can start on the low end and slowly build scale and move up market to better challenge MercadoLibre. And while it costs them some margin right now to focus on the lower end, I think lowering the threshold for free shipping and these similar moves that they're making is really a great way for them to win market share and is correspondingly a great long-term investment as they try to fend off Shopee.

• 32:29Speaker 01

  It's definitely working. I mean, the Brazilian e-commerce market was estimated to be about $100 billion last year, and MELI has about a 43% share in that market, and Shopee has 18%. And both actually grew three percentage points. So Shopee's not taking share from MELI, but mostly from legacy incumbents, just like MELI is. And they're not doing well at all. I mean, these, you know, legacy players, you have Casas Bahia, which basically filed for judicial recovery in August, and then you have another big player, or what used to be a big player, Americanas, which whose online sales fell almost 70% last year. So MELI also made a comeback in app users, which is important because more and more commerce is obviously moving to mobile. And that's where Shopee is extremely strong. First of all, given its roots in mobile gaming, but then also

• 33:12Speaker 01

  because it's a Southeast Asian company. And obviously, e-commerce over there has basically skipped the desktop era entirely. So Shopee had more monthly active app users in Brazil than MELI just a year ago, which was about 120 million compared to MELI's 115 million. In the second quarter of this year, MELI was back ahead, actually, with 134 million against 130 million for Shopee. So MELI's user base significantly outgrew Shopee, at least if we trust these estimates. And the reason it's so important that MELI keeps serving all customers is that MELI's biggest strength, in my opinion, is its ecosystem, which is becoming increasingly entrenched. So a customer, you know, finds a product on the marketplace, perhaps even through a MELI app, then pays for it using Mercado Pago, and then potentially even getting credit from Mercado Credito. And then it gets delivered

• 33:57Speaker 01

  by Mercado Envios, which is MELI's logistics business. And then at some point, a customer is just so entrenched that it will be incredibly hard for him to, you know, switch to a different marketplace, at least for these high-quality products that matter.

• 34:10Speaker 02

  And so that's why it's also important for us to watch out for Money, spelled M-O-N-E-E, and that is another subsidiary of C Limited. And if Money were to grab share from Mercado Pago, I think that would be another warning sign.

• 34:24Speaker 01

  Definitely. But I think that's another huge market where technically both can coexist for a while. That said, I would probably see Money gaining shares even more of a problem than Shopee, just because it would make the entrenchment theory much more difficult for MELI. Because by now, a huge differentiator is that people can go to Shopee to buy some of these products, but the entrenchment, where you have the marketplace, you have the payments, and you have the credit, that's mostly happening on MELI for Brazilian customers.

• 34:51Speaker 02

  Fortunately, for the time being, C Limited's Money business is not really even close to rivaling Pago or Credito. And so Shopee hasn't launched a credit card in Brazil, even though they have the license to do so. And its main credit product is still the Shopee Pay Later, sort of the buy now, pay later at checkout product, which accounts for about 10% of its Brazilian gross merchandise value. And those loans have an average term of about three months and carry interest of almost 10% a month. And we're also starting to see delinquencies tick up. Last time you said you'd be very surprised if C could hold its non-performing loans at 1% of their total. And so C's group-wide 90-day number

• 35:35Speaker 02

  is still 1% for now. But in Brazil specifically, the funds that hold Shopee's loans show 90-day delinquencies up to about 3% in a little over a year. And the more they expand that loan book, especially into categories outside of buy now, pay later, the more we should expect that number to go up.

• 35:54Speaker 01

  I'm pretty confident the trend will continue. And it's more of a mechanical thing in the end. So the loan book is growing so fast, just as it is for MELI, that some bad loans are simply not yet accounted for in the 90-day number. So there's a time lag, once again, between when they actually go bad and then when it shows up. And C doesn't disclose 15- to 90-day NPLs as MELI does. So you don't see that number going up anytime before the 90 days where we actually get the new number. And we should emphasize again, officially, the NPLs of Money are still at 1%, not 3%. But Money is generally still more of a digital wallet, whereas Pago has obviously evolved into much more than that. So that's why Money has only an estimated 1 to 2 million active credit users in Brazil, whereas MELI has more than 22 million.

• 36:38Speaker 02

  Do you have any updates on C's logistics network compared to MELI? Because I heard that C had expanded its footprint quite significantly. And they had something like 16 distribution centers at the start of this year, but built another 10 in the last 12 months. And five of those are fulfillment centers. Is that, is that all sort of right? And how does that frame the competition here?

• 37:01Speaker 01

  That's correct. And we should clarify, that's just in Brazil, obviously. And C's CFO has said the goal is to eventually have a bigger fulfillment network than its competitors in absolute volume. Obviously, he is talking about MELI in that term. And he said that it might take a few years. I doubt they will get there, but it definitely means they're not planning on stopping spending money.

• 37:19Speaker 02

  You say you'll doubt they'll get there because we're talking about a pretty big gap between themselves, right?

• 37:24Speaker 01

  Yes, a very big gap. So Meli leases about 3 million square meters of warehouse space in Brazil and Shopee about 1 million. So Meli pays about almost 100 million reais a month in rent, Shopee about 33 million. So Meli's network is still roughly 2.5 to 3 times bigger than Shopee's. And Meli will spend another 57 billion in Brazil this year alone, including 14 new fulfillment centers, which is why I'm saying I don't see the gap closing anytime soon.

• 37:52Speaker 02

  And when you say lease, it's really just about warehouses there. Both companies lease their warehouses to keep them less capital intensive. And the real difference is in how much of the delivery network each one controls. And so Meli runs its last mile through dedicated carriers where it is usually the main or only customer. And its new one-hour delivery in Sao Paulo runs through its own network. And so Shopee's delivery arm, on the other hand, handles most of its orders, but it does crowdsource drivers and its four-hour service runs through basically these partner stores. So Meli has tighter control over speed and reliability, but Shopee has a cheaper, looser

• 38:37Speaker 02

  network to maintain. And before we go any further, is there anything about Amazon that we should talk about? Because basically, Amazon is a competitor in Latin America, not nearly as dominant as it is in the US, but Amazon will seemingly be there to compete more directly with Meli for the highest quality tier of customers in e-commerce.

• 38:57Speaker 01

  I think a couple of years ago, basically before Shopee showed up, most investors were concerned about Amazon, yes. But I think now we could say that still not too much has changed. In 2025, Amazon invested close to 20 billion reais in Brazil, which was about five times its average annual investment there since it entered the country. So it's expanded its logistics primarily, launched an ultra-fast delivery service and also ran a campaign at the beginning of this year, letting new sellers join without paying any commissions. Share-wise, though, that didn't seem to move the needle because Amazon is still sitting at the same 11% of market share that it did last year, while Meli and Shopee, again, both grew 3 percentage points. So just for context, 20 billion reais is a lot of money, but Meli invests 3 times that this year.

• 39:42Speaker 01

  So Mexico is probably the market where it's a close fight. Amazon's Mexican network is about 30 times bigger than when it started and reaches more than 500 cities. And Mexico is where Meli's comment goes, actually slowed this year, which we will get to later. But management is saying that it's still growing faster than its competitor, which in this case, Meli is referring to Amazon. And the slowdown had more to do with the tax reform and a weak consumer overall than with competition of Amazon.

• 40:08Speaker 02

  If you were to have to summarize how you currently view the dynamic between Meli and its competitors, what would be the best way for you to do that?

• 40:16Speaker 01

  Well, I think we hype up Meli so much that I also want to be very honest, even though some Meli bulls might not want to hear that, more competition is never good. And Shopee has clearly been more competition than I assume anyone would have thought when they entered Brazil. And as Mungo once said, we have found in a long life that one competitor is frequently enough to ruin a business. So I don't think this will be the case here, otherwise obviously we wouldn't be invested in the stock. But I don't believe either that Meli will ever be without a competent competitor again. And that has been the case for many, many years before Shopee and some of these other competitors entered the market. So the question is, what does that mean for the mature margins of the business?

• 40:55Speaker 02

  I think that's a question any fundamental investor in Meli is asking themselves. And what has really happened here to current margins is it's been a downward slope from 12% to a little less than 7%. And that's the lowest margins have hit in four years. And now it seems you really have two camps of investors and how they think about things. And so one camp says, you know, hey, look, Meli will never get back to 12% margins because it now faces its most intense competition yet, and competition is only going to intensify. And so that's one perspective. And then the other camp compares these investments to, say, what Amazon was doing in the US in

• 41:34Speaker 02

  the early 2000s, where short-term investments result in an even stronger moat and thus even more earnings power and margin potential in the long term, even if short-term margins are compressed by that reinvestment spending. And what underlines that view is really how successful these investments have been at acquiring new customers and improving usage among long-term customers. And Meli posted its fastest revenue growth in four years, up 50%, and then it posted its first quarter above $10 billion in revenue.

• 42:09Speaker 01

  It's definitely incredible, just at this scale, how fast the business is still growing. And I know we all want a definite answer to this question of where margins will be. And I also know many pretend they have it. I admit that I don't. I can only look at the facts, then compare things to, for example, Amazon back then with their investment cycle, and then add the knowledge that I hope I've gained after looking at all the Asian e-commerce players and how they typically operate. And I think people forget that things seem obvious after the fact. So when Amazon started reinvesting massively in its business, the majority of the market believed Amazon simply had an unprofitable business model, and they faced all the same criticism Meli does today, even more so since the model back then was completely unproven. And it's also important to know that Amazon operated in the strongest and most advanced

• 42:54Speaker 01

  e-commerce market in the world. So they were able to reach a monopoly-like position before any competitor was actually able to recreate something similar. And that's not Meli's situation. Although the market share numbers would actually look quite similar, I think a major difference in the US is that you have competitors like Walmart and Target that people don't consider typical e-commerce competition, but ultimately a sale that goes to Walmart can go to Amazon. So the big question for Meli is whether Brazil, Argentina, and eventually also Mexico will look more like the US and Europe, or more like China with, you know, multiple major players and much more dynamic competition generally.

• 43:30Speaker 03

  Let's take a quick break and hear from today's sponsors.

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  All right, back to the show.

• 46:35Speaker 02

  To me, the former seems probably more likely. While there's still plenty of room to grow, Brazil is not some young market that could still go in any direction by any means. And then it's hard to imagine where all the other competitors are really supposed to come from and what role they would serve that's not yet being catered to. And as you mentioned, there's also a real political incentive here, especially now with Flavio Bolsonaro likely taking office to help South American companies succeed instead of flooding the market with Chinese players and their products.

• 47:08Speaker 01

  If you compare the characteristics one to one, it seems definitely more likely that Brazil would end up with a US-like structure. So on logistics, for example, the reason new e-commerce players in China could expand so quickly is that the third-party carrier infrastructure is so incredibly good. So the so-called Tongda franchise plus carriers like JNT, they move more than 70% of China's parcels at incredibly low prices. In Brazil, on the other hand, an entrant needs to build the entire infrastructure itself. So for payments, many problems are now solved, but MercadoPago still had the first move advantage. And then if you compare that to the US, you had neutral card networks, which is why no competitor could use payments as a sort of weapon or at least major advantage against the competition.

• 47:51Speaker 01

  And then in China, you have a duopoly outside the marketplaces with Alipay and WeChat. So Tencent's Rail basically powered Alibaba's challenges like Pinduoduo and Douyin. So all of this could be an important differentiator because MercadoPago is already highly dominant and it's owned by Meli, obviously, which opens up all sorts of ecosystem benefits. And the same goes for credit. Amazon's never had a landing book, and in China, this space is much more regulated since ad financial. So this is the sort of advantage that is pretty unique to Meli.

• 48:25Speaker 02

  I'm going to show my ignorance here on payments again, but my understanding is that there's a government-led payment network called PIX, P-I-X. And is that something that could cause any pressure on MercadoPago's business? Or are they doing different things? How much overlap is there?

• 48:42Speaker 01

  Yes and no is the short answer. I would say that it could be a problem, but also there are a couple of benefits that Pago actually has because of PIX. So for example, the more benefits for MercadoPago customers are in the app, especially when they use Meli, the more sense it makes for customers to use Pago to pay. So I think I'd rather have a government-created PIX as a competitor than an alternative created by a competitor. So PIX is a problem, but it doesn't do any lending. It's only a rail for basically payments to go through, and that's not where most of the value is coming from with MercadoPago and Creditor.

• 49:17Speaker 02

  And so another difference from when Amazon built its e-commerce business is that the barriers to entry have come down since platforms like TikTok have been able to expand into the space. And customers no longer have to come through product search, but you can actually have hundreds of millions of people find their way through social media, which clearly makes it easier to spawn an e-commerce business out of nothing, especially when that delivery infrastructure is already effectively in place.

• 49:44Speaker 01

  Which I should say is only partly the case in South America. We also need to consider, obviously, the massive size difference between countries like Brazil and China. So for example, China's physical goods e-commerce is about $1.8 trillion, and then industry-wide GMV margin of 2%. That would mean there's a profit pool of roughly $36 billion a year. So I would personally say that's enough to have four players fight for that pool. And then even in the US, the market is $1.2 trillion. So if you compare that, Brazil's market is only estimated to be $60 to $80 billion, depending on the definition of GMV. It could also be slightly higher. So it's obviously growing fast, but for players currently getting into Brazil, they would need to spend billions of dollars while mathematically not being able to make any

• 50:28Speaker 01

  profits because the market is just not big enough yet. So most public companies, I would assume, don't want to burn through billions of dollars for years to potentially open up a new market that is far away from their core market, which is true for basically all of the global e-commerce players not yet in Brazil, especially when you already have a dominant and well-executing player like Meli in the market, and also a player like Shopee who is catering to the lower end of the market.

• 50:53Speaker 02

  Just to get back to the margin story, I think the reason that margins are down supports the thesis that it's not really all competitive pressure. I mean, sure, Meli wouldn't need to spend all that money if Shopee didn't exist, but we don't see price wars happening where either one of them are really significantly cutting their take rates. And actually, Shopee has been raising seller fees for a while now. And so if you want to enter a price war to take market share, it's really the opposite of what you would want to do. And so the margin compression really is coming from investments and credit and free shipping, and then of course, expanding logistics, but not from cutting their take rates to undermine each other.

• 51:33Speaker 01

  Booking the provisions, which is what we talked about before for the loans, is actually the biggest part of the margin compression, and that has nothing to do with Shopee or competitive pressure. So in Q1, that alone cost four percentage points of operating margin. And then in Q2, it was slightly lower, but it was still two percentage points. So the biggest impact after that is free shipping, and that's definitely a reaction to Shopee. And while it's expensive, I think it's a classic Amazon move to take market share. And it worked pretty well. So Meli was outgrowing Shopee despite the much larger base. And I should also note that they have done that before. Even before Shopee existed, from time to time, they have lowered the free shipping threshold because it's a fantastic way to get new people into the ecosystem. And then another part of the Amazon playbook is the investments into first-party retail,

• 52:16Speaker 01

  where Meli basically buys inventory and then sells it itself instead of just taking a fee from a third party offering their products on the marketplace. And that's about $5 billion of sales a year, now growing 70% to 80%. And the CFO actually said, "It's still not profitable on its own once you allocate corporate costs." So Meli does this to win high-quality categories where selection was thin before. And for example, we're talking, whenever that's the case, it's now a leader in cellphones in Brazil with three times the share that it only had three years ago. So it's definitely working. It's expensive for now, but that's how you grow the business.

• 52:52Speaker 02

  Those are really exactly the type of categories you want to win to keep the highest spenders on the platform. But unlike Shopee, Meli has lowered some seller fees, right? And it added discounts for buyers who pay with PIX, which is a bit of a counterintuitive thing to do, at least as it seems to me at first. I mean, isn't that sort of preventing more of its customers from using MercadoPago to pay or using Meli's credit cards and promoting an alternative?

• 53:20Speaker 01

  It is. I mean, it's essentially a bet on acquiring customers cheaply and then turning them into long-term MercadoLibre and eventually MercadoPago customers, and that's where you make the money. So the idea is that they will still pay through MercadoPago, but you can use PIX through MercadoPago, which in that case is just your digital wallet. So it's not as straightforward, but you can imagine that, for example, you would use PayPal, go into your wallet, and then you use a local credit rail, which in this case is PIX to send the money. So that means that PayPal is not making any money on this case. MercadoPago is not making any money with the transaction, but you still have the customer in your wallet. So eventually, you might be able to make money with them in any other way. And Meli, again, doesn't earn transaction fees, but if you can make money, for example, from the customer funds, that's still a plus.

• 54:03Speaker 01

  And as mentioned, perhaps eventually they will turn into customers that have credit cards for Meli. So that's basically how you make the money back. But as you said, it's a trade-off, right? Where if you use PIX and you don't pay any money, most likely you will not switch from that. And then the bet is that you make money with them in a different way. So to me, this seems like a smart investment in the long term, especially because PIX will not go away. And I don't think you'll make a lot of money with the simple pay-through Mercado wallet anyway. That's basically the pretty legacy business model of PayPal that is clearly not working anymore, especially in a world and in a country where PIX exists. So Meli delivers value on the credit side, BNPL, credit cards, payback, and so forth.

• 54:43Speaker 02

  To just name some of the results of Meli's investment cycle recently that go beyond revenue growth, due to more volume, you have the cost of shipping one package in Brazil actually fall 11% in Q4 and 17% in Q1 in local currency, while volume was up more than 50%. And the more packages you get through the system, the more efficient the operation gets. And Meli set some price ranges below about 80 reais, which is the free shipping threshold for non-Meli Plus subscribers are already at break even. And you also see that more people start building a habit around ordering at these levels. So conversion in Brazil, meaning the share of visits that end in a purchase, is up about

• 55:28Speaker 02

  1.1 percentage points and has stayed there for a full year. And purchase frequency is up around 20%, while daily active users have grown faster than monthly active users in every quarter since the cut, which tells you that the app is becoming part of people's routine, and not just a routine, their daily routine. And Meli Plus subscribers, as mentioned, are up 72% year-over-year. So really, the numbers on all fronts look really good.

• 55:55Speaker 01

  And it actually shows you how the scale economy's shared model works. Because for the longest time, when Meli was going down with the free shipping threshold, they lost money on those packages. And now they have so much more volume that they basically start to make money or at least break even on the free shipping threshold. So you can imagine that the more volume goes through their logistics system, in some years' time, they can lower the threshold again, and they don't lose money on that. Whereas Shopee, for example, they have to pay up for lowering the free shipping threshold because for them, it's not profitable because you don't yet have the volume. Although I should say that part of the advantage of Shopee is that if you in these lower-term, lower-quality goods, you send a lot of volume through your system. So that's why they can also have these low free shipping thresholds.

• 56:37Speaker 01

  But again, I also want to emphasize that you don't even need Meli to have a highly profitable e-commerce business. The fact that Meli had one for such a long time was an outlier if you compare to any global player. Amazon's e-commerce business, for example, was always a low-margin business. They make money through ads and AWS, and Meli's ads business is still growing fast. And instead of AWS, they obviously have MercadoPago, and that business again earns roughly 20% margins after credit losses on its book, and it's already 43% revenue. It grows faster than commerce. So I think that's a very good outlook for Meli in the next couple of years. And in a competitive market, I think it's fine for the commerce side to basically run at a thin margin if that's what keeps 90 million buyers in the ecosystem, and as long as the fintech side actually earns the profits on those same customers.

• 57:21Speaker 01

  So Shopee can match Meli on shipping, but it's much harder to match it on credit. So the most important thing is to build the credit business responsibly so it doesn't blow up in bad times, which always comes at some point.

• 57:33Speaker 02

  Okay. Well, why don't we bring it all together? Is there anything that has changed about the valuation since we last looked at Meli? I would assume it's mostly unchanged, but perhaps you can just walk us through the assumptions again that you use in your model to help explain why we decided to add Meli to our portfolio in the first place and then add to it more in our portfolio review livestream. And so it's been a lot of fun to be able to take our normal portfolio conversations that would just be in a kind of a meeting with me and you and Kyle and turn them into livestreams on YouTube where we can get feedback from listeners in real time. So if you haven't checked that out, you know, the intrinsic value podcast on YouTube and you'll find our archive of livestreams and some of the recent portfolio discussions we've had.

• 58:19Speaker 01

  It is a lot of fun and we mostly stream on Wednesdays, but sometimes the days alternate. So you can go to our community tab. Often we do announce when exactly we'll stream and also the time right there. So for everyone interested, tune in and getting to the valuation. I did update my Meli model with the newest numbers and some slight adjustments for growth and the margin estimates, not dramatic though. So the difficult thing generally about forecasting the next few years is that it basically entirely depends on what strategy Meli takes. So in my model, I assume the massive investments that we currently see will be scaled back year by year, which causes revenue obviously to go slightly slower, but margins to tick up again. So given management comments, they might keep investing for a while and I can't blame them seeing how much they grow, not only the headline numbers, but as you just

• 59:04Speaker 01

  showed us, also the numbers that actually show how entrenched the new customers basically become in the Meli ecosystem. And it's only smart to keep that momentum going, even if markets don't like the investments and especially when competitors like C Limited are currently getting punished even harder for their investment cycle by the market because likely, you know, they will stop at some point. And if you keep investing, the benefits of that will be even larger. So to put it all in numbers, I have 2026 revenue going up another mind-boggling 45% to over $40 billion, but then it slows down starting in 2027 with commerce growing 25% and fintech 32%. Then from there, commerce and fintech both decelerate a couple of percentage points per year. And again, this would basically assume investments will be scaled back. And

• 59:48Speaker 01

  because of that, the operating margin that currently stands at only 7% will creep higher again, reaching 13 to 14% by the end of the decade, which sounds like a lot, but it was 12% just two years ago.

• 1:00:00Speaker 02

  That's a pretty hefty earnings growth there, about $177 in earnings per share projection for 2030. And today we stand at $40, but I think that's really not that crazy to predict. And it's just the kind of thing that happens when you have a company with the growth track record and the growth runway that Meli has, and they're sort of relentlessly reinvesting back into the business and harvesting the fruits of what they currently make to keep spinning that flywheel that we've been talking about. And just a reminder for listeners, Meli is the only company ever at significant size that was able to grow 30% or more for

• 1:00:40Speaker 02

  30 consecutive quarters straight. So these growth numbers are really more attainable and reasonable and actually maybe even conservative than it might seem at first. And actually, it would imply that they're going to break their streak of 30% plus growth sometime next year. And really the bigger question for me is on the margin front, but looking at your model, you've got MercadoPago growing to be the same size as the commerce business by 2030, meaning the higher margin part of the company will actually grow the fastest, which would be another tailwind for businesses overall profitability and for earnings growth.

• 1:01:17Speaker 01

  Meli definitely is a margin story right now. Assuming a mid twenties multiple and a 10% discount rate, the fair value based on the above estimates is close to $3,000 with a 20% margin of safety, which is what we usually have in the end to for model, you would get to $2,400. But then again, you know, these models always are based on the timeline and our assumptions for the timeline. And this model assumes that the investment slows down in the next one to three years, which might not be the case. So I own Meli not because I believe that, you know, in the next five years, they will get significantly better or improve margins. I believe this will simply be a better and bigger business in 10 years' time. And I don't think you need to be able to forecast the next year or even the next three years. Just have an idea in mind of what growth should roughly

• 1:02:00Speaker 01

  look like and what the mature margin is. And with those numbers that I have in mind, I think Meli looks incredibly attractive here, especially the longer you look out.

• 1:02:07Speaker 02

  I think both camps in the margin debate may actually be arguing about the wrong number. And of the five points of margin that Meli gave up, the biggest piece is this day one loss provisioning on credit cards, which is really an accounting timing issue more than anything and not due to competition from Shopee. And the free shipping piece is a competitive response, but it's also one that's working pretty well where conversion is up, frequency is up, cost per package is falling and Meli has grown faster than Shopee while off of a bigger base, right? Sort of define the law of large numbers. And the thing that would actually scare me would be if we saw any take rate cuts and we haven't seen those. And Shopee, as we've mentioned, is raising seller fees and that's not what

• 1:02:52Speaker 02

  happens in a price war. You don't have companies increasing take rates when they're trying to undercut each other. And commerce really can run at a thin margin forever as long as it keeps 90 million buyers inside the Meli ecosystem, because the fintech side of things is where the profits come from. And you can almost say that the commerce side of the business is just a vehicle for facilitating the fintech part of it, whether that's with the credit card lending or the payment processing. And so it's already 43% of revenue, the fintech businesses, and it's growing faster than commerce and it earns 20% after credit losses. And having that loyal ecosystem of customers obviously also

• 1:03:32Speaker 02

  creates huge advertising opportunities too, as we've seen Amazon prove, they've become one of the biggest advertising marketplaces in the world. And so the credit book is probably the one thing that gives me some pause and maybe some anxiety, especially when you pair it with the position that we have with our existing stake in Nubank, making us pretty highly leveraged to the Latin American market and more specifically the Latin American consumer at a minimum. And that will make for a volatile ride if history is any guide. But I do love the idea of owning great companies and to be cliche, just letting them do their thing. And we talk a lot about hurdle rates and trying to find investment opportunities

• 1:04:14Speaker 02

  that can clear a 12% rate of return for us over a several year period. And I feel pretty confident that with Meli's growth prospects and then at the price we're buying into at this moment, which is an outrageous valuation, given the growth, I feel pretty good that it can meet our IRR hurdle requirement.

• 1:04:33Speaker 01

  That's the bet we're taking, right? Like owning a great company and then just letting them do their thing. When I was still doing my research, Betsy asked me whether we should also cover the political debate currently going on Brazil with all the elections. And I looked at the Brazilian elections and, you know, what the win of either Botswana or Lula could mean for Meli, Nubank and so forth. But to be honest, both candidates don't seem to be highly popular. And I can see why when I look into what the program actually is. And while the atmosphere towards businesses in general might be better under Botswana, I don't feel comfortable at all predicting any outcome and not only for the election itself, but also for what a win of either of them would actually mean for the Brazilian

• 1:05:13Speaker 01

  economy going forward. And ultimately, I think I take comfort in the fact that Meli performed phenomenally under the presidency of left-leaning candidates and then also under the presidency of right-leaning candidates. And not only in Brazil, but in basically all of Latin America. And as we worked out in our original episode, Meli works the way it does today because they were able to make a strength out of these shortcomings of Latin American politics, right? We talked about some markets that were basically completely gone and how they have these, you know, logistic networks that are not as capital intense because they never know what happens to a specific market. And as you just said, the idea is to own a phenomenally run business with a strong flywheel and lots of runway. And if I believe the president of Brazil would make a significant difference, honestly, I wouldn't even want

• 1:05:57Speaker 01

  to be invested in Meli anyway, or Nubank for that matter. And with that, if you have nothing to add to the politics of Brazil, let me close it for today with a quote by Meli founder Marcos Galperin. And basically on that exact topic where he said, quote, "Unfortunately, the stereotypes about that market are true. Infrastructure is not as developed. Regulations are backward. Regulators are just trying to optimize for themselves, not for the people, and it's a very volatile environment." And all of a sudden we have elections and then a new government comes in and changes everything. So with Meli's management team being aware of that, I feel quite confident that they can manage that quite well. And I think that's all we have to say with that. Have a great day and see you in the next one.

• 1:06:39Speaker 00

  Thanks for listening to TIP. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principal, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions

• 1:07:21Speaker 00

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