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Over the last 12 months, there has been an unprecedented sell-off in fintech and e-commerce stocks globally. Valuations for many of these companies have come under significant pressure and now trade at or close to historical lows, as investors begin to digest the potential of a new paradigm where interest rates remain higher for longer. However, there are select companies, some of which are included in the core VanEck Emerging Markets Fund (the “Fund”), where underlying fundamentals remain robust and continue to deliver strong growth momentum even in a post-pandemic world.
MercadoLibre Inc. (NASDAQ:MELI) (3.28% of Strategy assets) is a prime example. Driven by the digital platform, scale and efficiency gains, MELI continues to be an exceptional company, off index, all process-driven – further supporting our statement that the Strategy’s investment philosophy and process do work over time.
MercadoLibre is Latin America’s (“LatAm”) leading e-commerce platform and the company is on the way to becoming a dominant player in the fintech space as well. It is the top e-commerce third party (“3P”) marketplace1 and digital payments operator in the region,2 with a presence in 20 countries and a user base of 37 million unique buyers. We believe the fintech (digital payments) business model is a long-term value driver for the company.
Our investment case for MELI was threefold, based on structural growth opportunities:
Data as of March 31, 2022. E is defined as Estimates. E-commerce sales as a % of total retail, Retail Value RSP excluding Sales Tax. (Euromonitor, BofA Global Research)
Competitive advantage – MELI has consistently been able to increase its market share in Brazil from ~15% in 2014 to ~35% in 2019, while competitor share has either been flat or down. The source of this sustainable, structural growth comes from a highly competent and responsible management team, capable of making well-thought-out decisions to unlock long-term growth.
Data as of March 8, 2022. Gross merchandise value (GMV) is the total value of merchandise sold over a given period of time through a customer-to-customer (C2C) exchange site. It is a measure of the growth of the business or use of the site to sell merchandise owned by others. (BTG Pactual, Company Data)
Consolidated GMV (US$mn), y/y (%).
Data as of February 11, 2021. (BofA Global Research)
Competitive advantage – Native user base of 37M unique buyers on their marketplace platform – users can be leveraged and incentivized to use the digital wallet off-platform. Comps in the U.S. and China tell us that scale can, and usually is, a defining feature of players that win in this space. Over the years, MELI has been able to add new and differentiated functionalities to its wallet platform, which should translate into even greater adoption and use over time. The company has focused on the Brazilian credit card market segment and it is estimated that 2M people are already on MELI’s waitlist. We believe the issuer’s fintech profitability model should improve because its credit card business line has grown within its credit portfolio as the company continues to leverage its extensive database. Consumer credit remains a huge opportunity for growth, as MELI has access to its users and user data needed to feed into its credit scoring models.
To reiterate, VanEck’s Emerging Markets Equity Strategy is benchmark agnostic. The Investment Team is highly skilled and capable to identify and invest in forward-looking, sustainable and structural growth companies, regardless of their inclusion/exclusion from an index. The fact that MELI is excluded from the index further validates our statement that emerging markets indices are backward-looking by default and, therefore, unable to capture the forward-looking, sustainable and structural growth companies that we are after.
Our Strategy is a process-driven investment solution designed to access forward-looking, sustainable and structural growth companies across all emerging markets with an emphasis on sustainable business models and responsible management. MELI is emblematic of the Team’s investment philosophy and while the company’s share price has contracted meaningfully since September 2021, the underlying performance of the business could not be more contrasting. Despite the challenging macroeconomic backdrop for technology companies globally, MELI has strung together sequential quarters of strong revenue and crucial profit growth that has exceeded market expectations. The company has exercised its pricing power by raising take rates across business lines.
E-commerce and fintech remain in their nascent stages in emerging markets with relatively low penetration rates. We view MELI as one of the best ways to access these structural growth trends within our investable universe. The company’s strong sequential performance over the last few quarters has only served to boost our conviction in the name, as it demonstrates its pricing power through raising take rates across their business lines. Investment in this company also aligns with a broader focus on trend acceleration within the portfolio-we have reduced “social” consumption-based around travel and other “out-of-home” activities, while further boosting our exposure to “remote” consumption implicit in e.g., e-commerce and digital payments. As a result, we currently approach the second half of the year with an optimistic outlook, despite the current market environment.
1 The company operates platforms for other businesses to sell its inventory.
2 Includes online payments, offline payments, wallet and credit.
3 A take rate is the fee charged by a marketplace on a transaction performed by a third-party seller or service provider. The take rate is a determining factor in a marketplace’s revenue as reported on its income statement: Take rate * GMV (gross merchandise volume) = revenue.
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