James Chapter 4 verse 10 states, "Humble yourselves before the Lord, and he will lift you up."
There's a lot of practicality in being humble. For me, whenever I have success, and become arrogant or prideful, I find that things usually go south pretty quickly whether directly related to my success, or much worse so, in other parts of my life. Pride always leads to a fall at some point, while humbleness always helps me focus on what the life's most important priorities are.
I find this extremely true when it comes to investing, especially as I am not working on Wallstreet, and yet I am competing against them from an investment performance perspective. This blog by no means assumes that getting ahead of Wallstreet suggests I am doing a better job (performance results illustrate this), but rather is focused on how setting expectations sooner than later through financial modeling can give investors a jump on where a particular company may be going.
There's been a lot of backlash with Wallstreet, notably, with the recent trading activity in companies like GameStop Corp. (GME). I think it's important for any investor not directly working on Wallstreet to understand that Wallstreet has its own set of rules of how the game is played. This includes short and long positions, that tend to work in concert in many ways. Regardless, it affords investors outside of the game, plenty of opportunities to still be equally or better successful with investment returns.
MercadoLibre, Inc. (MELI) is a very strong company that operates primarily in Latin America with the majority of Revenue generated from Brazil, Argentina, and Mexico. The company is a hybrid between E-commerce and Fintech businesses, having a strong history of successfully defending itself against larger competitors, including Amazon, Inc. (AMZN) and eBay Inc. (EBAY).
In 2019, the most recent fiscal year, MercadoLibre generated $2.3 billion in Revenues with a 20% Operating Cash Flow, OCF, margin. Wallstreet analysts are projecting $3.9 billion and $5.5 billion in Revenues for 2020 and 2021. However, we are already in February 2021and MercadoLibre is expected to report next week. By now, any investor should already be modeling MercadoLibre's expected Revenues for 2022 and developing an18-month Price Target, PT, accordingly. Wallstreet operates on their own timeline, and there is a great opportunity to get ahead of them based on this.
I prefer to begin modeling the next fiscal year of performance for any company in the fall of the prior year. Essentially, as any company has already provided its third quarter result, it is prudent to begin estimating the next fiscal year to assess a two-year horizon, in order to already be ahead of Wallstreet expectations (it should be noted that this is all driven by what is available publicly).
What this will do is depending on growth and expectations, set an updated PT. In the event a company is continuing an upward Revenue growth trajectory, with stable and/or improving OCF, the revised PT will likely offer a strong premium above the current level of Wallstreet analysts.
For MercadoLibre, the average Wallstreet analyst PT last fall was below $1,700 per share. During this time, I was updating my financial models, targeting $6.8 billion in Revenues for 2022, while assuming that the Cash Flow, CF, inflection that has occurred with an OCF margin at 30% would remain stable. Based on an OCF per share multiple at 65 times, I increased my 18-month PT to $2,600 per share, reflecting a nearly 60% premium from Wallstreet average PTs last fall.
This earlier assessment has already paid off as MercadoLibre has witnessed multiple Wallstreet analyst PT increases above $2,000 per share - HSBC to $2,100, Citi to $2,150, and Deutsche Bank to $2,200. The average Wallstreet PT now stands at just below $1,800 per share, a 31% discount to my PT, so there's more room for PT increases.
As a quick frame of reference, Amazon, Inc. (AMZN) is trading nearly 35 times OCF per share and is expected to grow Revenue just above 15% per year the next two years. MercadoLibre's valuation is less than double that of Amazon, while Revenue and OCF is growing double and 50% faster. Shopify, Inc. (SHOP), the second largest E-commerce company in the U.S., is modeled to be trading 300 times OCF per share, with Revenue growth estimates at around 45% per year through 2022.
I am confident that in the event MercadoLibre cane meet or exceed financial model expectations through 2022, that the valuation will reach $2,600 per share, or even higher over the next 18-months. At similar business stages back in 2003, Amazon was trading around a similar multiple as MercadoLibre, with not even one-third of the OCF success. What is unfortunate is that many investors were too caught up with the P/E ratio back then, which led them to miss a tremendous investing opportunity. While it remains to be seen how far a company like MercadoLibre can continue to scale, a similar opportunity over the next decade is on the table.