A wonderful article - thanks for sharing! I like the deep dive on restricted cash and your approach to back-test valuation assumptions shown in the current price. That way you make the underlying dynamics very transparent. I usually work the other way around - start by analysing fundamental statements and then derive a valuation level. Interesting angle for sure!
Thank you! Your method certainly works too, I prefer to start with back-test assumption because if it becomes apparent that the expectations are already high, you can skip the stock without a full analysis.
That's the tension MELI lives in right now. And that's why you were smart to pass before earnings at +2.98%. The margin compression confirmed the competitive pressure is real, and the credit book expansion means the risk profile is shifting.
this a tech company or a bank? Because if it's a bank operating in volatile Latin American economies with a $12.5 billion credit book and 15% Brazilian interest rates, the valuation math changes completely. Tech companies get 40x PE. Banks get 10x.
Can you make sense to those cashflows, with strict criteria FCF was already 1,5 billion last year and if you calculate Melis loans receivables - fintech funding as growth investment the owners fcf balloons to over 6 billion as 2025.
I’m afraid I don’t fully understand the wording. If I interpret you correctly, you mean that the net increase in loans receivable, after fintech funding, should be treated as a discretionary growth investment, not a recurrent drag on FCF. It might be the case, but it does not change the overall picture much.
First, exactly this kind of aggressive investment helps MELI grow so quickly, and that quick growth is the reason we are considering MELI in the first place. One can argue that a more moderate deployment of capital would create more shareholder value, but that would also mean second-guessing management’s judgment without much evidence that they are wrong. They are certainly better informed, and so far they have proved that they can execute.
Second, as you saw in the article, most of the value in all scenarios is created in the terminal stage. That reflects investors' sentiment perfectly: people do not care much about current FCF, but want to hold a part of a juggernaut in the future.
So even if we double the adjusted FCF MELI reported without harming growth, essentially getting $1.5B for free (very generous!), it won’t move the needle much. $1.5B for 10 years with a 12% discount rate (also favorable!) gives us around $8.5B of present value. That’s around 10% of the market cap. I do not think 10% added by very generous assumptions provides a sufficient margin of safety.
You constructs a static annuity — $1.5B flat for 10 years — which assumes zero FCF growth and argue that it doesnt move the needle much. OK. That’s not a conservative assumption, thats an completely absurd example for Meli. Put some growth to it and then check again.
Of course any growth stock is highly sensitive to terminal value assumptions. This has nothing to do with annuity calculations. That is true of almost every growth company by construction.
The real analytical question is: what FCF growth rate (and not some accounting EBIT numbers but actual free cahsflow) does the current market cap imply, and is that rate achievable?
With the maintainance investments and restricted cash substracted from OCF the FCF yield is massive at the moment. There is not that much growth discounted to it as you think.
My calculation in the comment was, of course, about the additional value created by this “saved” FCF, not about the valuation of the whole business.
The key question is not simply whether a given FCF growth rate is achievable. The key question is whether MELI can beat the expectations already implied by the current price by a wide margin. If it merely meets those expectations, then the result is market-level returns, not outperformance.
It seems that the main disagreement between us is that you do not treat adjusted FCF as the right metric here. I would be genuinely interested to understand why.
The essence of FCF is that it is cash available for discretionary use by the company and, ultimately, for shareholders. MELI itself explicitly says:
“We consider adjusted free cash flow to be a measure of liquidity generation that provides useful information to management and investors since it shows how much cash the Company generates with its core activities that can be used for discretionary purposes and to repay its corporate and/or commerce debt.”
If that is true, then adjusted FCF seems to be the most economically relevant cash-flow measure here. If you think that is wrong, I would appreciate hearing your reasoning, that indeed might change the whole picture.
You are exactly right about the cashflow. So why not start from there and follow your own advice? You are the one doing the valuation from ROIC/reinvesting framework and deriving FCF from your assumptions instead of starting from the actual FCF.
Im the one who is trying to look and interpret the actual cashflows, so you comment is very confusing
You didn't answer my question and instead started attacking me personally. That's not a productive discussion. Either stay on point or refrain from commenting. If your next comment doesn't add value, I'll delete it and ban you.
For others who might read this, I'd add that the key in expectations investing is not bureaucratically following FCF, but examining economic reality and probabilities. The ROIC/reinvestment framework is a suitable tool. It's not absolute truth, just a model, but a useful one.
”Can you make sense to those cashflows, with strict criteria FCF was already 1,5 billion last year and if you calculate Melis loans receivables - fintech funding as growth investment the owners fcf balloons to over 6 billion as 2025. ”
1,5 billion is the adjusted FCF and I use it from the very first message while you make your DCF where you dont use it, (derive it from ROIC and reinvesting rate) while commenting to me
”It seems that the main disagreement between us is that you do not treat adjusted FCF as the right metric here. I would be genuinely interested to understand why.”
As per our DCF, MELI is just slightly undervalued.
Thanks for the great post!
I think MELI is one of the most interesting stocks in the market today! Great upside.
A wonderful article - thanks for sharing! I like the deep dive on restricted cash and your approach to back-test valuation assumptions shown in the current price. That way you make the underlying dynamics very transparent. I usually work the other way around - start by analysing fundamental statements and then derive a valuation level. Interesting angle for sure!
Thank you! Your method certainly works too, I prefer to start with back-test assumption because if it becomes apparent that the expectations are already high, you can skip the stock without a full analysis.
That is fair point!
That's the tension MELI lives in right now. And that's why you were smart to pass before earnings at +2.98%. The margin compression confirmed the competitive pressure is real, and the credit book expansion means the risk profile is shifting.
this a tech company or a bank? Because if it's a bank operating in volatile Latin American economies with a $12.5 billion credit book and 15% Brazilian interest rates, the valuation math changes completely. Tech companies get 40x PE. Banks get 10x.
Strong and fragile?
Can you make sense to those cashflows, with strict criteria FCF was already 1,5 billion last year and if you calculate Melis loans receivables - fintech funding as growth investment the owners fcf balloons to over 6 billion as 2025.
I’m afraid I don’t fully understand the wording. If I interpret you correctly, you mean that the net increase in loans receivable, after fintech funding, should be treated as a discretionary growth investment, not a recurrent drag on FCF. It might be the case, but it does not change the overall picture much.
First, exactly this kind of aggressive investment helps MELI grow so quickly, and that quick growth is the reason we are considering MELI in the first place. One can argue that a more moderate deployment of capital would create more shareholder value, but that would also mean second-guessing management’s judgment without much evidence that they are wrong. They are certainly better informed, and so far they have proved that they can execute.
Second, as you saw in the article, most of the value in all scenarios is created in the terminal stage. That reflects investors' sentiment perfectly: people do not care much about current FCF, but want to hold a part of a juggernaut in the future.
So even if we double the adjusted FCF MELI reported without harming growth, essentially getting $1.5B for free (very generous!), it won’t move the needle much. $1.5B for 10 years with a 12% discount rate (also favorable!) gives us around $8.5B of present value. That’s around 10% of the market cap. I do not think 10% added by very generous assumptions provides a sufficient margin of safety.
You constructs a static annuity — $1.5B flat for 10 years — which assumes zero FCF growth and argue that it doesnt move the needle much. OK. That’s not a conservative assumption, thats an completely absurd example for Meli. Put some growth to it and then check again.
Of course any growth stock is highly sensitive to terminal value assumptions. This has nothing to do with annuity calculations. That is true of almost every growth company by construction.
The real analytical question is: what FCF growth rate (and not some accounting EBIT numbers but actual free cahsflow) does the current market cap imply, and is that rate achievable?
With the maintainance investments and restricted cash substracted from OCF the FCF yield is massive at the moment. There is not that much growth discounted to it as you think.
My calculation in the comment was, of course, about the additional value created by this “saved” FCF, not about the valuation of the whole business.
The key question is not simply whether a given FCF growth rate is achievable. The key question is whether MELI can beat the expectations already implied by the current price by a wide margin. If it merely meets those expectations, then the result is market-level returns, not outperformance.
It seems that the main disagreement between us is that you do not treat adjusted FCF as the right metric here. I would be genuinely interested to understand why.
The essence of FCF is that it is cash available for discretionary use by the company and, ultimately, for shareholders. MELI itself explicitly says:
“We consider adjusted free cash flow to be a measure of liquidity generation that provides useful information to management and investors since it shows how much cash the Company generates with its core activities that can be used for discretionary purposes and to repay its corporate and/or commerce debt.”
If that is true, then adjusted FCF seems to be the most economically relevant cash-flow measure here. If you think that is wrong, I would appreciate hearing your reasoning, that indeed might change the whole picture.
You are exactly right about the cashflow. So why not start from there and follow your own advice? You are the one doing the valuation from ROIC/reinvesting framework and deriving FCF from your assumptions instead of starting from the actual FCF.
Im the one who is trying to look and interpret the actual cashflows, so you comment is very confusing
You didn't answer my question and instead started attacking me personally. That's not a productive discussion. Either stay on point or refrain from commenting. If your next comment doesn't add value, I'll delete it and ban you.
For others who might read this, I'd add that the key in expectations investing is not bureaucratically following FCF, but examining economic reality and probabilities. The ROIC/reinvestment framework is a suitable tool. It's not absolute truth, just a model, but a useful one.
How im not answering it? My very first message:
”Can you make sense to those cashflows, with strict criteria FCF was already 1,5 billion last year and if you calculate Melis loans receivables - fintech funding as growth investment the owners fcf balloons to over 6 billion as 2025. ”
1,5 billion is the adjusted FCF and I use it from the very first message while you make your DCF where you dont use it, (derive it from ROIC and reinvesting rate) while commenting to me
”It seems that the main disagreement between us is that you do not treat adjusted FCF as the right metric here. I would be genuinely interested to understand why.”
Make it make sense.