Markets continued to face some resistance for the third week in a row. Money seems to be rotating through the market, rather than leaving altogether with many expecting further support packages for the economy.
Thesis - From their investor relations page “MercadoLibre is the largest online commerce and payments ecosystem in Latin America”. Frequently dubbed as the “Amazon of South America” Meli has grown into a diversified internet business. Based in Argentina, the company started by offering a digital marketplace that allowed people to upload and sell their stuff (like eBay). They have since grown tangential businesses, such as advertising, shipping (MercadoEnvios) and online payments (MercadoPago). They operate in 18 countries, many of which stand to benefit from an increased shift of customers to the internet and mobile. Over the last 5 years, the stock has increased by almost 10x. Since March the stock has almost tripled, giving it a rich valuation. The recent market dip means Meli is currently off its all-time highs by 13%.
Leadership - The company was founded by Marcos Galperin, an Argentinian who developed the idea whilst studying at Stanford Business School. He has been CEO for 21 years. He managed the company through its early growth and has grown with the business, overseeing several bolt-on acquisitions. He has an approval rating of 95% on Glassdoor. He is a visionary leader with local market knowledge, who has been able to strategically grow the business into large additional opportunities (such as payments). There was some concern earlier in the year that he was stepping down as CEO, but the company confirmed he stepped back specifically from Argentina operations, but remains the company CEO.
Financials & Performance - Public since 2007, Meli has achieved average revenue growth of approaching 40% over the last ten years (!). The last 4 quarters have seen revenue growth of 60%. Gross margins have steadily decreased, reflecting the companies investments in costly infrastructure to support delivery, but still stand at a respectable 50%. The company was profitable before 2018, but has posted losses across the last two years. This is a decision to invest in the company moat, rather than any dent to the business.
Risks - MercadoLibre faces some political instability in the market it operates in (as with many emerging markets) as well as currency risk. As the leader in the space, it will also face increasing competitive pressures from other startups, where VC investment in LatAm has been steadily increasing over the last 5 years. Finally, they are investing heavily in logistics and delivery, the value of which will need to be monitored in the coming years.
Thesis - Teladoc is the global leader in virtual healthcare. Their primary product connects patients and doctors over video conferencing, however their ambition is to own all of digital healthcare. Since I first mentioned Teladoc in edition 2, Teladoc have merged with another hot healthcare company, Livongo. Livongo build software that helps patients and doctors manage chronic conditions (primarily diabetes). Investors initially reacted badly to the merger, with both stocks taking a price cut. Since then the stock has moved sideways. However, in early September the company quietly released an updated presentation that revised upwards the expected growth of the joint company, showing the management teams confidence. Both companies have seen huge increases in stock price year-to-date, with Telemedecine clearly a huge beneficiary of the current environment. The long term goal to digitise the healthcare industry is clearly very future relevant and the combined entity is well placed to capitalise.
Opportunity - Teladoc estimate that the total addressable market for the combined company is $121b. Overall healthcare spend in the US alone is significantly bigger, so the long term investor can see continued expansion. As well as its primary physician service, Teladoc also offer virtual counselling for mental health. The acquisition of Livongo, specialising in chronic conditions, compliments their existing on-demand services very nicely.
Financials & Performance - Revenue growth accelerated to 85% in the last quarter. Before that, revenue growth had levelled at around 25-30%. Gross margins have consistently been just under 70%. The company is not yet profitable as it continues to invest in growth, in 2019 announcing they are active in 130 countries with 27 million members.
Risks - Healthcare is a large opportunity that will surely attract a lot of competition. Both Apple and Amazon have been eyeing up offerings in the space. Specifically relating to the merger - it needs to be approved by the competition authorities (although doesn’t seem at risk) and the planned synergy needs to be successfully executed.
Thesis - Schrodinger is a recently public business with two distinct units. First, they are a software company that builds a platform that allows scientists to develop molecules for drugs quicker, cheaper and more successfully. They have 1,300 customers on a recurring revenue model that has software margins and 96% retention. The second unit is in drug discovery itself, partnering with others to create molecules as well as a wholly owned pipeline. I like the business model as they “drink their own medicine” so to speak, using their software platform in the drug discovery process itself. Unlike most drug discovery companies, their software business gives them a recurring revenue base. Whilst this is a young business with a lot of risk, the price has fallen 47% from its highs in July providing an entry point. The Gates Foundation is a significant shareholder.
Financials & Performance - The company has only been public for a year, so we don’t have many quarterly reports to go on. The company is still loss making. However, both business units did grow revenues from the first half of 2019 to the second half of 2020 by 24% (drug discovery) and 25% (software) respectively. For the software business, the top 10 customers make up 28% of revenue and no one customer contributes more than 5%. For a young company, they are relatively diversified. On the drug discovery side, they have 2 compounds which are FDA approved and stand to earn royalties.
Risks - As mentioned the company is still not profitable and the drug discovery side of the business is particularly risky. On the software side, there are other AI driven platforms in the space (not yet public).