Yes, this unheralded Latin American firm really could be the next Amazon

The similarities between Us-listed Mercadolibre and the American ecommerce giant are striking

TWENTY years ago every investor was searching for “the new Microsoft”; today we all want to identify the next Amazon. One fund manager thinks he may have found it – in Brazil. Before you turn the page on the basis that Brazil is too exotic a market for you to invest in, we should say that the company concerned is listed in New York and is already worth about $10.4bn (£8.1bn). The business is called Mercadolibre (“free market” in Spanish) and is essentially an ecommerce retailer that operates in many Latin American countries, including Brazil, Argentina and Mexico. The combined population of those three nations is about 380 million, roughly the same as America and Britain combined. The firm’s sales are growing by 40pc a year and it reinvests heavily in growth, just as Amazon has tended to do. It started by selling mainly electronics but has expanded its range steadily – again emulating the US giant.

Like Amazon, it makes most of its money from enabling other companies to sell their goods by providing the shop window, the payment systems and the delivery service. Consequently, it tends not to actually own the goods it sells, but instead makes a commission on the sales made by its partners. One professional investor who owns shares in Mercadolibre, and believes the company has many years of growth in front of it, is Ben Preston of Orbis Investments.

“Successful generalist retailers tend to benefit from a ‘network effect’ – customers keep coming back because they know that the retailer stocks just about everything they need, and suppliers want to sell their goods there because they know that’s where the customers are,” Preston said. “Traditional retailers exploited this effect gradually, opening stores in new towns and eventually building a nationwide network. It was slow and expensive. An ecommerce retailer, such as Amazon or Mercadolibre, can do it much more quickly and cheaply.”

The network effect is selfreinforcing: the bigger the company gets, the stronger its appeal to customers and suppliers. If this process continues for long enough, the firm’s position can become almost unassailable. This is arguably already the case with Amazon in many of the countries in which it operates, such as Britain: it’s hard to imagine that a competitor, no matter how determined and well funded, could dislodge it from its dominant position.

Mercadolibre is not quite in that position yet in its own markets – Preston estimated that it was about six years behind Amazon in the development cycle – but at current rates of growth it can reasonably expect to be there in a couple of years. After that, the window of opportunity for would-be rivals will close.

The biggest danger probably comes from Amazon itself, but there is little sign that it is ready to make a major assault on Mercadolibre’s territory. “Amazon is in the process of expanding in India, an even bigger market,” Preston said. “Even when you are the size of Amazon there is a limit to how many big projects you can take on simultaneously.”

Of course, there is another way in which Amazon could seek dominance in Latin America: it could try to buy Mercadolibre instead of competing with it. This would no doubt give the latter’s shareholders a very decent premium on the current share price.

Either way, Questor shares Preston’s view that Mercadolibre is a compelling and overlooked opportunity to invest in a firm with striking growth prospects.

When it comes to valuation, Preston said his analysis of Walmart, Amazon and Mercadolibre indicated that all three showed a close correlation between market value and total sales during their expansion (“sales” for the two ecommerce retailers were regarded as the value of goods sold on the platforms). This means that if Mercadolibre’s sales continue to grow, there is every reason to expect its share price to follow suit.

One potential drawback is exchange rate movements, as Latin American currencies have historically been weak, although any devaluation is unlikely to be enough to counteract all of Mercadolibre’s growth.

British investors can buy shares in Us-listed firms via many brokers, although there is often extra paperwork to complete. “Withholding” taxes on dividends should not be a problem as Mercadolibre, as a growth stock, currently makes only a nominal payout.

Questor says: buy

Ticker: MELI (Nasdaq)

Price at 6pm: $236.55