Latin America's leading e-commerce platform, MercadoLibre (MELI 1.03%), had a stellar first quarter of 2021. Total revenue surged 111% higher year over year (or up 158% when excluding foreign currency exchange rates) as online shopping caught up to developed-market levels in countries like Brazil, Argentina, and Mexico.
But buried in the earnings release was a mention that the company started purchasing Bitcoin (BTC +4.30%) during the first few months of the year -- $7.8 million worth, to be exact. No word on whether MercadoLibre will continue buying the top cryptocurrency or not, but it did say the acquisition was part of its "treasury strategy." What's that supposed to mean?
There is extra risk inherent in emerging markets
One argument made for owning Bitcoin and other cryptocurrencies is because they're a store of value -- meaning they will hold their value better than a fiat currency issued and backed by a government. For a business operating in Latin America, this has some merit. Due to a confluence of economic factors, currencies like the Argentine peso and Brazilian real (pronounced "hey-ow" in Portuguese) have historically been volatile.
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In fact, back in 2018, MercadoLibre had to transition its operations in Argentina to "highly inflationary status" in accord with U.S. 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 equaled just under 14 Argentine pesos. As of this writing, $1 is nearly 95 Argentine pesos. Basically, the same pesos don't go as far toward making purchases as they did a few years back.
We've all experienced this here in the U.S. as well, but not nearly to the same degree. Remember when you could get a candy bar for less than a buck? Not so easy to find anymore. This has real-world consequences for businesses, too. The big difference MercadoLibre habitually reports between actual revenue and currency-exchange-neutral revenue is the end result of this inflationary effect -- like how currency-neutral-revenue grew 158% in Q1, but actual reported sales were up only 111% in the first quarter of 2021.
So back to this talk of a "treasury strategy." Basically, this refers to actions a company will take to ensure it has the money it needs to pay for operations and any expansion in the future. With inflation a very real long-term risk in Latin America, a company like MercadoLibre needs to protect its assets. Since Bitcoin has a cap on total supply, rising demand could keep the price rising higher, which could offset the effects of inflation. By 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 equivalents, another $326 million in restricted cash and equivalents, $980 million in short-term investments, $176 million in long-term investments, and $20.3 million in intangible assets (the line item under which Bitcoin is filed). The grand total: $2.37 billion in liquidity, offset by debt of $2.18 billion.
Put simply, a $7.8 million bitcoin purchase is a mere 0.3% of MercadoLibre's total liquidity. Perhaps it will buy more as part of its strategy in subsequent quarters, but for now, the crypto asset plays a tiny role here.
Decentralized finance to the rescue?
While it's starting small compared to the likes of Square (which owns hundreds of millions in Bitcoin), cryptocurrency could play a much larger role at MercadoLibre in the future. It's been reported that consumers in countries like Argentina have flocked to cryptos as a way to protect their assets from runaway cost-of-living increases. And given the soaring price of Bitcoin in recent years, the strategy has worked. MercadoLibre also accepts bitcoin as payment in Brazil and Argentina. Just recently it started accepting the crypto as payment in Argentina for real estate listings on its site. If currencies like the real or peso don't stabilize, maybe decentralized financial instruments (those not controlled by a central bank) really will be the future in markets like Latin America.
Investor takeaway
At this juncture, don't go buying MercadoLibre stock just for the exposure to Bitcoin. It's a tiny piece of the company's overall strategy, one that won't move the needle -- at least not yet. But it's certainly a point of interest for shareholders to keep an eye on if cryptos become a more important part of the e-commerce giant's risk management strategy.
