Best of Ghost Mail: MercadoLibre, nacho ordinary tech company

Just because it’s your go-to online store doesn’t mean that it makes a profit. The Finance Ghost digs into the eCommerce players and points out his most admired company in this industry.

Takealot has been in the news recently, with the Competition Commission ordering the business to split its operations in two. The retail and marketplace operations need to be separated, which is a huge change for the business and a major problem when you consider that Takealot couldn’t even make a profit before the split.

Without the Naspers balance sheet, it’s unlikely that Takealot would be anywhere near its current size. Winning market share is great. Winning market share with a profitable model is even better. Takealot couldn’t even get this right in the pandemic, so what chances does it have now?

Money pits

Tech companies that lose money are nothing new. The venture capital space is designed around taking companies to the next milestone, which is very different to targeting profits. A milestone could be a number of users, the launch of a specific product or a key partnership.

Although Uber doesn’t play in eCommerce, it’s another perfect example of a company that was built to grow rather than to be profitable. People are celebrating the company’s first profitable quarter with a $326 million operating profit. It’s just a real pity that the company burnt $31.5 billion getting to this point! 

The financials along the growth path are usually ugly, which is why “building in public” i.e. doing this as a listed company is difficult. Takealot gets to hide inside the Naspers numbers, with only a few comments in the supporting narrative about the extent of losses.

Amazon is hardly any better to be honest. In the International business, which is still in its relative infancy, they make losses every single quarter. That’s still not the most shocking thing about Amazon. No, the most shocking thing is that one of the most important companies in the world produces a slide deck that looks this amateurish:

At least Amazon’s North American business is making money again. The results in this business are as erratic as the Proteas in a World Cup, so time will tell whether the improvements will stick. The trend over recent quarters is astonishing, with a year-on-year swing from a loss of $627 million to profit of $3.2 billion.

Is there a way to invest in this space with less of a rollercoaster ride?

Head south of the border

In South America, we find perhaps the most impressive eCommerce retailer of all: MercadoLibre. This is nacho ordinary tech company, as this group makes profits and can’t rely on a seemingly endless flow of investment capital in the US. They can’t rely on bad puns either.

Forced to build in a way that is sustainable, MercadoLibre has built a coherent and intelligent ecosystem. They aren’t playing games with expensive content businesses, or a desire to build a global logistics footprint. No, they are all about a focused strategy.

It works. In fact, it works really well. MercadoLibre just announced another record quarter in Q2’23, with net revenue up 57.2% year-on-year and income from operations of $558 million at a highly respectable 16.3% margin.

Alongside the eCommerce business, MercadoLibre has built an impressive financial services ecosystem that includes credit and payments products. The logic behind this is that transactions require financial services, something I can certainly get behind.

It makes a lot more sense than Amazon trying to compete with Netflix. Does a content business really belong inside an eCommerce platform?

In the 14 quarters since the start of the pandemic, MercadoLibre has been free cash flow positive in 11 of them. Amazon has been free cash flow positive in just 6 of those quarters. Although there is no comparing the size of the businesses (a positive quarter at Amazon is many times larger than at MercadoLibre), we can certainly compare the share price performance, starting with a five-year view: 

One thing you might notice about this chart is the double top chart pattern that played out at MercadoLibre. It’s well worth spending some time understanding more about the most commonly used technical patterns. These are good additions to a fundamental investment toolbox.

If I had to pick between MercadoLibre and Amazon for the next five years, it would be a very easy decision to add a little salsa to my portfolio.

For those with a shorter-term lens, the performance this year has been incredibly tight, with Amazon’s recent performance helping it pull ahead:

South African consumers are in pain. We know this. It’s a headache that just keeps getting worse for people, with food inflation at astonishing levels and Eskom kicking us while we are down. 

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