Offshore

⁠Dimitry Nakhla | Babylon Capital®
5 months ago I stated:

“I consider $MELI a strong buy closer to $1,700💵 (~9% below today’s price) where I can reasonably expect ~14% CAGR while assuming a 36x end multiple, ensuring some margin of safety”

Since reaching my $1,700 target $MELI shares have rallied +46%✅

As I suggested in the post attached below👇🏽

“$MELI boasts an expansive growth trajectory, fueled by powerful network effects that should drive sustained momentum

Key factors contributing to its promising outlook include 🔑

1. Margin expansion

2. Unparalleled access to Latin America's burgeoning economy

3. Network effects that produce self-reinforcing dynamics ensuring long-term competitiveness, among other things

Those buying $MELI today at $1856💵 are buying it for a fair price, with little margin of safety — however, these growth rates have to be revised down substantially for $MELI to miss the mark, even if the company grows earnings at 25% CAGR over the next 5 years, shareholders will likely end up with a decent return

I consider $MELI a strong buy closer to $1,700💵 (~9% below today’s price) where I can reasonably expect ~14% CAGR while assuming a 36x end multiple, ensuring some margin of safety”
____

While a rapid appreciation in share price can be gratifying, it's often counterintuitive for long-term investors

Ideally, I prefer to see these high-quality businesses trade at attractive valuations for an extended period, allowing for the accumulation of shares at a more favorable price

This enables us to build a larger position in a company we believe in, ultimately increasing our potential for long-term returns

A quality valuation analysis on $MELI 🧘🏽‍♂️

•NTM P/E Ratio: 49.60x
•1-Year Mean: 48.36x

As you can see, $MELI appears to be trading near fair value

Going forward, investors can receive roughly the same in earnings per share 🧠***

Before we get into valuation, let’s take a look at why $MELI is a great business

BALANCE SHEET✅
•Cash & Short-Term Inv: $6.67B
•Long-Term Debt: $3.04B

$MELI has a strong balance sheet, an ok BB+ S&P Credit Rating & 20x FFO Interest Coverage

RETURN ON CAPITAL🆗➡️✅
•2019: (4.8%)
•2020: 3.7%
•2021: 8.1%
•2022: 14.2%
•2023: 25.3%
•LTM: 20.1%

RETURN ON EQUITY🆗➡️✅
•2019: (14.2%)
•2020: (0.1%)
•2021: 5.2%
•2022: 28.7%
•2023: 40.3%
•LTM: 42.6%

$MELI has strong and improved return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2018: $1.44B
•2023: $14.47B
•CAGR: 58.64%

FREE CASH FLOW✅
•2018: $133.35M
•2023: $4.63B
•CAGR: 203.29%

NORMALIZED EPS✅
•2018: ($0.82)
•2023: $22.84

SHARE BUYBACKS❌
•2013 Shares Outstanding: 44.53M
•LTM Shares Outstanding: 51.28M

MARGINS🆗➡️✅
•LTM Gross Margins: 52.5%
•LTM Operating Margins: 11.4%
•LTM Net Income Margins: 7.8%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive roughly the same in EPS

Using Benjamin Graham’s 2G rule of thumb, $MELI has to grow earnings at a 24.80% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2025 - 2026 EPS growth over the next few years to be more than the (24.80%) required growth rate:

2024E: $33.59 (47.1% YoY) *FY Dec

2025E: $45.76 (36.2% YoY)
2026E: $62.50 (36.6% YoY)

$MELI has an ok track record of meeting analyst estimates ~2 years out, but let’s assume $MELI ends 2026 with $62.50 in EPS & see its CAGR potential assuming different multiples

40x P/E: $2500💵 … ~15.5% CAGR

38x P/E: $2375💵 … ~12.7% CAGR

36x P/E: $2250💵 … ~9.7% CAGR

34x P/E: $2125💵 … ~6.7% CAGR

As you can see, $MELI appears to have attractive return potential IF we assume >38x earnings (a multiple justified by its growth rate & moat)

$MELI boasts an expansive growth traj[...]

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