MercadoLibre (MELI) was a Serenity level holding in the Freedom Portfolio, but after last week’s huge jump it has now been promoted to an Enterprise level position. Despite its (originally) relatively modest size, it’s one of my favorite positions and it’s well past time that I give the company its due and provided a proper write-up.

I first bought shares of MercadoLibre in 2016. As of this writing, it is the fourth best performing position in the Freedom Portfolio, and as you can see from the chart below, it’s been a particularly exciting past few weeks. While there’s always a great deal of regret about not owning more of a big winner, I’m especially kicking myself over not having bought more of MercadoLibre over the past few years. In every “stock market challenge” that I have done with friends (a pre-cursor to fantasy investing), I have chosen MercadoLibre as one of my top conviction holdings when able. So it’s a little baffling to me why it remained a Serenity level holding for so long and why I didn’t consider adding to it.

MercadoLibre is also a pick for my 2019 Fantasy Investing Portfolio, and
I wrote a little bit about the company then. The overly simple comparison is that they are the Amazon (AMZN) of South America (they do most of their business in Brazil, Mexico, Argentina, and formerly Venezuela), but that doesn’t tell the whole story.

MercadoLibre has four main businesses, which you can read more about in the summary document here:

• MercadoLibre – The main eCommerce business
• MercadoEnvios – A fulfillment and shipping service
• MercadoPago – A payments service
• MercadoCredito – A financing service

All of these businesses combine to give MercadoLibre not only an incredibly “sticky” business which is hard to disrupt, but also a lot of exciting avenues for growth. The below tweet provides an interesting way to think about MercadoLibre.

Good day to have $MELI as one of your top holdings. Amazing that it is STILL a sub-$20 billion company.

For context:$PYPL – $112 billion$EBAY – $34 billion$AMZN – $797 billion$MELI is all three of these in one. There's room for growth.

— Brian Feroldi (@BrianFeroldi) February 27, 2019

Sure, it’s not exactly fair to compare MercadoLibre to a company like Amazon, but it’s also not crazy to think that they could get part of the way there in the near future. Brazil, Mexico, and Argentina combined have a population greater than the US and all three countries have a population growth rate higher than the US. All of this is without even counting any contributions from Venezuela, which was South America’s wealthiest country two decades ago. If that country can get back on its feet, that is another potential up and coming developing economy that MercadoLibre can benefit from. Even if MercadoLibre can only ever get to 1/10th the size of Amazon, that still gives them a market cap four times the size that they are now. That doesn’t seem like a completely unreasonable expectation given their current position and the different business lines they offer.

MercadoLibre released their fourth quarter results recently and business was pretty much booming across the board. The only notable weakness was in volume of goods sold in Brazil due to a conscious effort to move away from low cost items thanks to an increase in shipping costs. Here are my key takeaways:

• Net revenue was up 62% year over year in local currency
• Total payment transactions were up 72% year over year
• Mobile point of sale total payment volume is growing triple digits in both US and local currency

Interested in reading more? The Fool has a good article recapping MercadoLibre’s earnings. As I mentioned before, while the company is growing fast almost everywhere, I especially wanted to highlight the ridiculous growth that they are seeing in payments. This is a huge growth opportunity for the company. As mentioned before, Paypal has a $100+ billion market cap, so there’s a lot of room for growth for MercadoPago alone, not even counting the rest of the eCommerce and fulfillment business.

P.A.U.L. Score

Protected: 4

This is the billion dollar question: Can MercadoLibre continue to be the dominant player in the markets they serve even while huge competitors like Amazon are investing heavily in the area as well? Considering the dominance that Amazon has in US eCommerce, that’s a pretty legitimate fear, but I think MercadoLibre has what it takes to hold its ground.

MercadoLibre has first mover advantage and seems to be beating Amazon in all the markets they compete in so far. MercadoLibre management has done an excellent job of copying the things that make Amazon such a great (and sticky) eCommerce company and have the additional benefit of being more of a local (and focused) company as well. Even if Amazon is able to eventually make inroads, non-US markets have shown that there can be multiple winners in eCommerce. Just look at Alibaba (BABA) and fellow freedom portfolier JD.com (JD) in China or Amazon and Flipkart (now owned by Walmart (WMT)) in India. The worst case scenario that I see for MercadoLibre is that it becomes the Pepsi (PEP) to Amazon’s Coke (KO).

Alternatives: 5

I feel like I’ve made this case pretty strongly above already. Mercado Libre has shown an incredible willingness to expand outside of the basic eCommerce marketplace that they started with and provide payments and fulfillment as well. Yes, it’s a path trail-blazed by Amazon, but it’s still impressive to see them execute that same plan so well over so many different countries.

Understandable: 3

Researching MercadoLibre can be a little overwhelming at the start. The biggest learning curve might be the sheer number of different business segments they have, but the different markets (and the resulting currency effects) are a close second. South America isn’t one homogeneous unit, and it can sometimes be hard to keep track of just what is going on in all the markets they serve. You probably know that Venezuela is falling apart, but did you know that recently Argentina had been dealing with a debt crisis and Brazil was going through a corruption scandal? For those reasons, it’s hard to give MercadoLibre any score higher than a 3 here.

Long Runway: 5

I absolutely love the opportunity in front of MercadoLibre. For starters, they seem to be in the early stages of a lot of huge trends like eCommerce and digital payments that I like investing in.

South America has always seemed strangely under the radar among American investors and overshadowed by China and India. There are a lot of pretty interesting developing markets in the area. I love almost everything about the long runway for MercadoLibre: A dominant player in the exciting eCommerce and payments space operating in developing countries who seem to be in the early innings of growth still.

Total Score: 17

A really good score. By my count, it’s the second highest company that I have rated so far. In fact, as I was writing this, I realized that how much I liked the company wasn’t accurately reflected in the size of the position in the Freedom Portfolio, so I purchased some more shares during a slight re-balancing that I’m hoping to talk about in the coming weeks. Really excited to see where this company is in 10 years.