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No. of Recommendations: 5
Well I thought I'd let you know that I sold because it did go above 40x FCF and with the exercise I did on the Latin Markets by Tim's suggestion showed this to be high. I don't have the numbers in front of me but I do know the assumptions in my growing 30% for 7 years would be this:

The Latin market would have to double in internet usage
The market share of MELI of that would have to double
This does factor in 40% drop in pricing
It keeps the 3 transactions per buyer the same
The buyer to seller ratio stays 3:1
I had the Pago % to merchandise quadruple
The rake(percentage of revenues to merchandise volume) was the hardest. I kept it the same even though I believe it would have to come down as MELI is growing the most in poorer countries. And managemnt hinted to this in the filings
And of course I haved normalized the tax rate as management said this is not sustainable and Tim has talked about it too.
Also, I did increase FCF margins a few percentage points as scale will help with this.

This yielded a 5 multiple in FCF moving it up from the current (my normalized number) 50 million to 250 million. If you put a 20 multiple on it, it makes it a double from here. When it doubles is when you think the assumptions will come true. I have around 7 years. It was in my DCF.

I sold at around 46.50 and that was at close to 41x FCF. Of course it ran up from there. I don't like to sell because of valuation concerns and it was actually excruciating to do. Maybe I should have trimmed if only to avoid going crazy. But back to MELI. There is a few things to add that would change things. You could say with scale margins could go higher than I assumed. But also I didn't decrease the "rake". So margins and "rake" decreases could offset. The population growth of 1% is not factored in which is not that important. But that leads to -- What are the demographics? If the trends are toward individuals who will more likely welcome the internet and internet commerce then that could boost growth. The main other catalyst for increasing the value is the payment system. If that really takes root especially as a platform for all types of internet vendors similiar to Paypal in the states then that could really boost the assumptions.

I almost forgot. The other reason to sell MELI, was that MELI was a big portion of my port compared to other emerging companies. This has allowed me to add to YONG and CGA. And it will allow me to keep powder dry for any other small cap emerging opportunities such as future china small caps ie WWIN and Brazilian Fast Food (Tims pick in yesterday's live chat meeting). In these emerging stocks I really do like to buy at cheap valuations and to diversify.

eric2800, long YONG and CGA
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