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MercadoLibre, Latin America’s leading e-commerce platform (NASDAQ: MELI) had a strong first quarter 2021. Total revenue grew 111% year-on-year (or up 158% excluding rate exchange rates) as online shopping has caught up with developed countries. market levels in countries like Brazil, Argentina and Mexico.
But buried in the results release, it was mentioned that the company had started buying Bitcoin (CRYPTO: BTC) in the first few months of the year – worth $ 7.8 million, to be exact. It is not known whether MercadoLibre will continue to buy the best cryptocurrency or not, but he said the acquisition was part of his “treasury strategy”. What is that supposed to mean?
There is an additional risk inherent in emerging markets
One argument made for owning Bitcoin and other cryptocurrencies is that they are a store of value, meaning that they will hold their value better than a government issued and backed fiat currency. For a company operating in Latin America, this has some merit. Due to a confluence of economic factors, currencies like the Argentine peso and the Brazilian real (pronounced “hey-ow” in Portuguese) have always been volatile.
Image source: Getty Images.
In fact, in 2018, MercadoLibre had to upgrade its operations in Argentina to a “highly inflationary status” in accordance with US accounting standards. High inflation erodes the purchasing power of a currency, making it less valuable over time. To illustrate this problem, five years ago, $ 1 was equivalent to just under 14 Argentine pesos. At the time of this writing, $ 1 equates to almost 95 Argentine pesos. Basically the same pesos don’t go as far for shopping as they did a few years ago.
We have all experienced this in the United States as well, but not to nearly the same degree. Remember when you could get a candy bar for less than a dollar? Not so easy to find anymore. It also has concrete consequences for businesses. The big difference that MercadoLibre usually reports between real income and currency neutral income is the end result of this inflationary effect – like the 158% growth in currency neutral income in the first quarter, but reported actual sales don’t grew only 111% in the first quarter. first quarter 2021.
So let’s come back to this discourse on a “treasury strategy”. Basically, it refers to the steps a business will take to make sure it has the money to pay for its operations and any expansion going forward. With inflation being a very real long-term risk in Latin America, a company like MercadoLibre must protect its assets. Since Bitcoin has a cap on total supply, rising demand could keep the price up, which could offset the effects of inflation. In contrast, if MercadoLibre kept its assets in cash in an economy facing rampant cost increases, its balance sheet would be less valuable over time.
That said, the recent Bitcoin purchase was very modest. At the end of March 2021, MercadoLibre had $ 863 million in cash and cash equivalents, an additional $ 326 million in restricted cash and equivalents, $ 980 million in short-term investments, $ 176 million in long-term investments term and $ 20.3 million in intangible assets (the item line under which Bitcoin is deposited). The total: $ 2.37 billion in cash, offset by $ 2.18 billion in debt.
Simply put, a $ 7.8 million bitcoin purchase is only 0.3% of MercadoLibre’s total liquidity. Maybe he will buy more as part of his strategy in the following quarters, but for now the crypto asset plays a tiny role here.
Decentralized finance to the rescue?
Although it starts out small compared to Square (which has hundreds of millions of Bitcoin), cryptocurrency could play a much bigger role at MercadoLibre in the future. Consumers from countries like Argentina have been reported to have flocked to cryptos to protect their assets from uncontrolled increases in the cost of living. And given the surge in the price of Bitcoin in recent years, the strategy has worked. MercadoLibre also accepts bitcoin as a means of payment in Brazil and Argentina. Most recently, he started accepting crypto as a payment method in Argentina for real estate listings on his site. If currencies like the real or the peso don’t stabilize, maybe decentralized financial instruments (those not controlled by a central bank) will really be the future in markets like Latin America.
Takeaway for investors
At this point, don’t buy MercadoLibre shares just to get exposure to Bitcoin. It’s a small piece of the overall corporate strategy that won’t move the needle – at least not yet. But it’s certainly a point of interest for shareholders to watch if cryptos become a more important part of the e-commerce giant’s risk management strategy.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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