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No. of Recommendations: 14
To steal a page from Berkowitz's play book I was asked to try to kill Mercado Libre in a bull/bear discussion. Tim asked me to share my notes with our members. This is not a balanced view. This was merely meant to be a jumping off point for discussion.

1. There are preconditions for internet commerce. When adjusting for these conditions (literacy and poverty being the most restrictive and persistent conditions) the potential market size is cut by more than 30%. (e.g., Brazil has an 86% literacy rate and an understated poverty rate >20%)

This reduced market has less than 1/3 the buying power of U.S. on a per capital GDP basis.

Is the market growing that fast? Purchasing power isn’t:
1960-1979 Latin America GDP per Capita up 80%
1980-1999 Latin America GDP per Capita up 11%
2000-2005 Latin America GDP per Capita up 1%

Is it possible eBay didn’t leave because they couldn’t compete? Maybe the market wasn’t valuable enough for them to invest in.

2. Country, Currency, and Political Risk
Let’s use sovereign debt ratings as a proxy: BB and below is speculative (non-investment grade debt). 3/4ths of countries MELI does business in have junk grade sovereign debt: adjust your discount rate accordingly! Note: Iceland was investment grade prior to default and subsequent government collapse.

3. Lawsuits
–Surprisingly Latin America’s like to litigate. From filings:

At September 30, 2008, there were 246 lawsuits pending against our Brazilian subsidiary in the Brazilian ordinary courts. In addition, at September 30, 2008, there were more than 1,970 lawsuits pending against our Brazilian subsidiary in the Brazilian consumer courts, where a lawyer is not required to file or pursue a claim. In most of these cases, the plaintiffs asserted that we were responsible for fraud committed against them, or responsible for damages suffered when purchasing an item on our website, when using Mercado Pago [online payments business -- similar to eBay's PayPal], or when we invoiced them.

Would you purchase goods and services online in Latin America? I expect street vendors in Latin America to defraud me…where is the accountability online? Adoption rates could suffer.

Nike sues too!

In August 2008 Nike was awarded a preliminary injunction to suspend the offer of Nike-branded products until seller could be identified.

4. High Taxes
Currently enjoys a blended Tax rate of 40%. What happens when 60-70% reductions in Argentina taxes expire in 2014? Tax rate could exceed 50%

5. Management will likely dilute existing shareholders…soon

In August 2007, we completed our initial public offering pursuant to which we sold 3,000,000 shares of common stock and certain of our selling stockholders sold 15,488,762 shares of common stock, resulting in net proceeds to us of approximately $49.6 million.

So why did they want to have a secondary offering for $292,140,000 last January? They withdrew this in March, but who can say that it isn’t still on the table?

At today’s prices that would be some serious dilution!

4,687 Exercisable options are outstanding

6. Valuation
Trading at over 40 times trailing Earnings and nearly 60 times trailing Free Cash Flow

Enough Said!

7. Hefty price for a business that is already slowing down—even before the Global Recession.

Registered Users 5yr CAGR = 53% Last Year=35%
Gross Merchandise Volume 5yr CAGR = 66% Last Year= 38%
Number Items Sold 5yr CAGR = 47% Last Year= 21%
AVG. Item Price 5yr CAGR = 13% Last Year= 14%
AVG Item per User 5Yr CAGR =(4%) Last Year =(11%)
Payment Volume as
% merchandise Volume 5yr CAGR =41% Last Year =12%

Fine Print: You may find this useful when discussing the risks of investing in Mercado Libre. As most of the conversation was verbal the notes are not comprehensive in nature. These notes ARE NOT a balanced discussion of Mercado Libre. They ARE NOT even a balanced view of my thoughts on Mercado Libre. The notes are only intended show MELI in a very unfavorable light. It was the responsibility if the Bull to refute or price in these data points. Hopefully you will enjoy discussing this in a similar manner.

Fool On!
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