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Earnings Recap – Week of 5/3/2020: Part 1

Earnings Recap – Week of 5/3/2020: Part 1

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This is a crazy week for earnings, with 5 of the top 10 positions in the Freedom Portfolio reporting earnings on the 5th or 6th and another 3 major positions reporting on the 7th. Here are some quick numbers and some thoughts from me about the first batch.

Disney (DIS)

  • Disney+ has reached 54.5M subscribers
  • Shanghai Disneyland will re-open within the week
  • Prior to the closure of domestic parks and resorts, volumes and guest spending were higher compared to the prior-year quarter
  • The summer dividend is being skipped, which will save the company about $1.6 billion
  • View Earnings Report Here
  • My thoughts: I was actually a little disappointed in the Disney+ subscriber numbers considering they had announced over 50 million a month ago. Still, Disney+ has been an unqualified success considering they are hitting their subscriber numbers 4 years early. Every other segment of their business is getting hammered, but Disney has plenty of cash available and should be able to weather this storm assuming theme parks / movie theaters / professional sports starts gearing back up in the not-too-distant future.

MercadoLibre (MELI)

  • Net revenue was up 70.5% year-over-year on an FX neutral basis
  • Total payment volume (TPV) through Mercado Pago was up 82.2% year-over-year on an FX neutral basis
  • Off platform TPV grew 139.5% year-over-year on a FX neutral basis
  • Mobile wallet saw 299.2% year-over-year growth on a FX neutral basis for the full first quarter 2020
  • Their new asset management product, Mercado Fondo, is now available in Argentina, Brazil and Mexico
  • View Earnings Report Here
  • My thoughts: What an amazing earnings report. Look at all of those massive growth numbers. It’s no surprise why the stock jumped around 20% after these earnings. Despite the big run-up, I think MercadoLibre’s growth is just beginning. Latin America as a region should have a long runway of growth ahead of it, and if Venezuela ever gets its act together or foreign currency headwinds turn into tailwinds, that could really help the company soar as well. Many people think of MercadoLibre as the eBay (EBAY) or Amazon (AMZN) of Latin America, but I think that comparison is increasingly inaccurate and selling them short. With their booming digital payments business, they are looking more and more like the Square (SQ) or PayPal (PYPL) of Latin America as well.

Shopify (SHOP)

  • Revenue of $470M beat estimates by $27.08M and was up 46.7% year over year
  • Gross merchandise volume (GMV) of $17.4B beat estimates of $16.83B and was up 46% year over year
  • Non-GAAP EPS of $0.19 beat by $0.36
  • GAAP EPS of -$0.27 beat by $0.50
  • Subscription Solutions revenue grew 34% to $187.6M
  • Merchant Solutions revenue expanded 57% to $282.4M, driven primarily by the growth of GMV.
  • View Earnings Report Here
  • My thoughts: Shopify’s numbers were fairly impressive (especially in how they beat some pretty high expectations), but the numbers don’t seem to tell the whole story here. Shopify seems to be the company for the current Coronavirus / social distancing moment in that they are ideally positioned to help companies adjust to selling things online. This is on top of already being the “rebels” to Amazon’s “empire”. The stock has been on a ridiculous run, and the valuation is getting very pricey, so it’s almost impossible for it to keep growing at this pace for much longer. Still, I considered selling Shopify back in June of last year when it was around $300 a share and can’t imagine how much I would’ve regretted it had I done it then. I don’t like to sell based on valuation concerns alone, so I’m sticking with Shopify to see where this story goes.
Mercado Libre 2019 Q4 results show it’s still growing like crazy

Mercado Libre 2019 Q4 results show it’s still growing like crazy

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Mercado Libre (MELI) announced their fourth quarter earnings yesterday after market close and put up some pretty incredible growth numbers. As a reminder, Mercado Libre is an eCommerce and digital payments company based in Latin America with most of their business happening in Mexico, Brazil, and Argentina. You could think of them as a combination of Amazon (AMZN), eBay (EBAY), PayPal (PYPL), and maybe even Square (SQ) of Latin America.

Here are the highlights. Since the company does business in numerous countries with different currencies, all numbers are in local currency unless otherwise specified.

  • Net revenue grew 84% year over year
  • For digital payments: Total payment volume grew 99% year over year, which was an acceleration from the previous quarter
    • This includes a huge 176% increase in off-platform payments
  • Gross Merchandise Volume (GMV) was up 40%
    • 109% growth in Argentina

Additionally, the company continues to make steady progress expanding their fulfillment network and growing their credit service, mobile point of sale (mPOS) and wallet initiatives. There are a lot of different ways for this company to grow.

The stock is currently down slightly, although it’s hard to see why. Margins dropped a bit due to the company spending a lot on growth, which is exactly what you would hope a company like this would be doing. I loved pretty much everything about this earnings report, as it shows that Mercado Libre is executing really well and has a lot of avenues for growth ahead of it. Digital Payments and eCommerce should continue to grow, as should the overall wealth of Latin America in general. Mercado Libre is already a Babylon 5 level position which is up 77% over the past year, otherwise I would consider adding to my position here. I love the potential of this company over the next 10+ years.

MercadoLibre is En Fuego

MercadoLibre is En Fuego

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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 in Green vs the S&P 500 in Blue

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.


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.

I like the cut of this JIB

I like the cut of this JIB

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F.A.N.G.

Have you heard of FANG before? It’s a common acronym for some of the largest technology companies in the United States that have had massive gains over the past few years. The acronym has gotten a little messy thanks to the desire to add Apple and the re-naming of Google as Alphabet, but here are the companies traditionally thought to be a part of the “FANG stocks” :

  • Facebook (FB)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Netflix (NFLX)
  • Google/Alphabet (GOOG)

You might recognize a few of those names from the October edition of the Freedom Portfolio. Investors who have held any of the above companies for any length of time over the past decade have to be pretty pleased with the results.

But I don’t want to talk about those companies right now.

B.A.T.

There’s an equivalent acronym for Chinese companies that is a little less commonly know: BAT. Like with the FANG companies, the BAT companies are some of the largest technology companies in China (and the world). Thankfully, the acronym is a little cleaner in this case. The BAT companies are:

  • Baidu (BIDU)
  • Alibaba (BABA)
  • Tencent (TCEHY)

Again, a lot of these companies are in the Freedom Portfolio. For Americans who don’t have much (if any) experience with these foreign companies, it can sometimes be difficult to wrap their heads around what exactly these companies do. For that reason, it has become common to associate the BAT companies with American equivalents as a shorthand. It’s not ideal, as oftentimes there are just as many differences as similarities, but it can be a good starting off point for understanding what these companies do. Here are the common equivalents given to the BAT stocks:

  • Baidu – Google
  • Alibaba – Amazon
  • Tencent – Facebook

It should be repeated that these comparisons are far from perfect. I would argue that in many ways Alibaba is more similar to Ebay (EBAY) than Amazon and Tencent is far more involved in gaming than Facebook is. If you find yourself interested in any of these companies, I would very strongly recommend digging in deeper to learn more and discover how the companies differ from the companies they are often compared to.

But I don’t want to talk (too much) about these companies, either. 

J.I.B.

No, I want to talk about a even less commonly known acronym: JIB. I know it’s less commonly used because as far as I can tell, it’s an acronym that I am coining right here, right now, although I’m sure it will be spread like wildfire and be used worldwide in a matter of months. JIB refers to three more Chinese tech companies that I believe have some interesting growth potential:

  • JD.com (JD)
  • iQiyi (IQ)
  • Baozun (BZUN)

Like with the BAT stocks, there are some commonly used equivalents.

  • JD.com – Amazon
  • iQiyi – Netflix
  • Baozun – Shopify (SHOP)

JD.com

Just like with the BAT stocks, I want to stress how imperfect these comparisons are. That should be evident with the JD / Amazon comparison, considering that Alibaba was also listed as “the Amazon of China” above. How can two companies be the Amazon of China considering how dominant Amazon is in e-commerce in the United States? The short answer is that the competitive landscape is simply different. In most ways, JD.com is actually an underdog to Alibaba in China. Alibaba has a larger market cap, has a bigger share of the Chinese e-commerce market, and has more cash on its balance sheet.

So why is JD.com like Amazon? Their business models are very similar. Like I mentioned before, Alibaba is more like an eBay in that it is largely facilitates transactions between two parties instead of directly selling things. Their consumer-to-consumer business is like traditional eBay where the seller and buyer are brought together on the platform, but then the seller is responsible for inventory and order fulfillment. They also have a business-to-consumer business where Alibaba again acts more like a middle-man. JD.com, on the other hand, has invested much more in terms of building out fulfillment centers and a logistics network. This gives it a lot more control over the quality of both the products being sold and the delivery of products which could give it an advantage long term over a company like Alibaba, despite currently being the underdog. 

Another similarity/difference worth noting, especially recently, is leadership. Just as Jeff Bezos has played an integral role in the rise of Amazon and continues to be an incredibly important leader, the same can be said of Richard Liu for JD.com. Unlike Jeff Bezos, though, there are some dark clouds hanging over the JD.com founder and CEO. A few months ago he was arrested over a rape allegation. As of the time of this writing, the case is still under investigation. While JD.com is larger than any one person, it would definitely be a blow to the company if he was forced to step down.

iQiyi

To carry on the theme of imperfect comparisons: While iQiyi is called the Netflix of China because of its subscription streaming video service, it isn’t nearly the leader to the same degree as Netflix is in the United States. They do, however, have another interesting connection with Netflix in that they have a licensing agreement with them. It seems like a good win-win scenario for both companies right now: Netflix gets some of their content exposure in China and iQiyi gets some presumably appealing content that other Chinese streaming services can’t offer.

Another way that iQiyi differs from Netflix is that it also has a fairly popular free, ad-supported video service that is more similar to YouTube. That’s a little interesting because iQiyi was recently spun out of Baidu (the aforementioned Google of China) and YouTube is a division of Google.

Lastly, while the Netflix comparison is the more popular one, iQiyi prefers to think of itself as being more similar to Disney (DIS). Why? So far Netflix has focused solely on video content, while iQiyi offers games, novels, and other merchandise which makes it more similar to a company like Disney, which does a great job of finding different ways to monetize their various properties through toys, clothing, amusement parks, etc.

One last point of interest is iQiyi has a partnership with fellow JIB member JD.com. JD.com has a membership program somewhat similar to Amazon Prime and one of the perks that were recently added was a membership to iQiyi’s program. Like the Netflix licensing deal, this seems like a win-win for both companies in that it makes JD.com’s membership more appealing while also giving iQiyi a greater membership base.

Baozun

Baozun might be the hardest of the group to describe what they do because unlike Netflix and Amazon, many people might not have heard of Baozun’s commonly named equivalent: Shopify. Luckily, I wrote something just last week about Shopify and what they do.

As with all of the companies discussed so far, while Baozun is similar to Shopify in many ways, it also has some differences. One of the larger differences is that while Shopify tends to focus on small companies trying to set up an e-commerce solution, Baozun has a lot of larger, more established companies as clients who are trying to get access to the Chinese market. The Motley Fool has a good article that explains some of the similarities and differences.

Baozun has some big names as clients: Nike (NKE), Microsoft (MSFT), and Starbucks (SBUX). Why would these massive companies feel like they need a company like Baozun? Because Baozun can help those non-Chinese companies quickly set up online stores on all of the biggest Chinese e-commerce sites and apps, like fellow JIB-er JD.com, Alibaba’s (BABA) Tmall, and Tencent’s (TCEHY) WeChat. There are a lot of major non-Chinese companies who are scrambling to get access to the Chinese market and its  increasingly internet-connected and growing middle-class. Baozun is well position to profit from that trend.

Current Events

I’m pretty excited about the prospects of all of the JIB companies that I mentioned above, and all in the Freedom Portfolio, but I would be remiss if I didn’t mention what has been going on with them lately. Put simply: They’ve been getting hammered. Two of them are down double digit percentages and the third isn’t far behind. There are a bunch of possible reasons behind the drops:

  • General market volatility over the past month
  • Concerns about a slowing Chinese economy
  • Concerns over tariffs and the continuing trade war with the United States
  • Concerns over increasing Chinese government regulations

All are completely valid concerns and I don’t mean to dismiss them, but if you’re looking at holding these companies for the long term (3+ years), then none of those worry me too much. In fact, I’ve been looking at the recent drops in the JIB companies as a possible opportunity to add to my positions. Trade wars down last forever. Economic slowdowns don’t last forever. The opportunity in front of these companies in terms of a growing middle-class not only in China but elsewhere in Asia is real and is too big for me to ignore, though. I wouldn’t be surprised if the next year or two is tough for these companies (part of the reason why I am holding off on making any moves), but over the long term, I like their chances of being big winners.

In short, I like the cut of their jib.