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No. of Recommendations: 8
what does that imply regarding growth going forward from today's low end of the fair stock price?

So, I modeled for 20% to 25% annual sales growth from 2009 to 2014 alongside 80% gross margins, EBIT margins that expand to 32%, and a 38% tax rate. I also assumed the company would see enhanced operating leverage in future years and diminished capex requirements. Translation: I am optimistic about the business.

Assuming those inputs, we're at fair value today in terms of a DCF. But if the company can sustain a 50x earnings multiple, we would see returns continue to mimic profit growth, so 20% per year. But I don't think a 50x earnings multiple is sustainable. A tech industry peer comparison seems to suggest that a 20x to 30x multiple is appropriate (though Amazon.com is an outlier and continues to blow my mind and trade for 50x earnings).

Now, if MELI is another Amazon.com in terms of market credibility, I have sold too soon and we will never get a chance to buy this back. But if we see multiple contraction down to the 20x to 30x range, then earnings won't catch up to the price here (i.e., you'll see zero returns for 3 to 6 years from the current price.

My own expectation is that currency effects are going to be an enormous drag on earnings this coming quarter and that the economic downturn has fundamentally affected consumer activity in Latin America. Thus, MELI may well disappoint high-growth investors who paid 50x earnings to own shares. Hopefully, that will provide a compelling opportunity to get back this great company at a good price.

But given what some of our other picks are selling for, this seemed like a nice time to take the premium the market was offering here and redeploy the proceeds.

Tim
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