by 10% annually since 2007, and should still exceed EBAY’s this year despite very
significant Latin American macro challenges.
Nor must this high profitability necessarily compress as competition enters. Latin
American e-Commerce is meaningfully behind the US, at just 2.7% of total retail vs
9.0-10% for US. Therefore the #1 player in each of its geographic markets should be
able to sustainably grow for many years, even with robust competition.
This is not a conventional value investment. For me to argue that it is cheap on
current or historic earnings multiples would first require of me plastic surgery,
elocution lessons, plus a follicle and personality transplant. The closest I can get,
slipping on a pair of fabulous 1990’s purple Gucci loafers acquired from its US competitor, is
that Price to trailing FCF (CFO – D&A – working capital changes) is…29x. Would it
help if I tell you that with no net debt the balance sheet is at least safe?
So the valuation is all about future growth. Though macro effects might in future
have material effects on the business, recent rapid FX depreciation have caused
translation effects to obscure underlying growth. This answers why I think it has
become cheap now. Unit measurement metrics can be used to isolate the underlying
growth rates of the business. For example, number of items sold is running at 28%
(consistently 20’s or 30’s growth during the past decade) and total payment
transactions last quarter was 76% (never below 30% since Pago was introduced).
These impressive pre-inflation, unit metrics suggest a robustly growing business.
Sure enough, when measured in local currency, the half of total sales coming from
Brazil is still growing at 58% despite a clearly depressed consumer environment, and
the quarter of total sales represented by Argentina is currently growing at 90% year-
on-year. Bad neighborhoods can have some bars and restaurants that make the trip
Both Brazil and Argentina would come close to bottom in terms of macro-economic
sentiment right now, for many good reasons best stated by people more eloquent than
me on the subject. Brazil’s decline in investor perceptions has been particularly rapid,
sinking from close to “most valuable player” status only a few years ago, to a market
that many investors currently appear to consider uninvestible. The feedback loops
from macro into this company’s earnings are real and many: significant currency
depreciation and inflation, higher cost of capital, depressed consumer sentiment. All
this translates into reported USD operating income actually declining, as some second
order metrics such as USD GMV should decline for the second consecutive year in
2015. It is hard to pay top dollar for a business that is likely to report horrible USD
numbers for several quarters to come. Yet at some point the FX should stabilize, and
meantime current local currency hyper-growth rates should continue during a
challenging economy. CFO Pedro Arnt has recently argued why:
1. Online marketplaces carry a deeper SKU count, allowing consumers to trade
down more easily.
2. Users approach the marketplace as sellers, trying to raise cash.