Quarterly Updates for Mercadolibre, Sprout Social, and Shockwave Medical

Three additional updates to share today, with recent earnings reports coming in from Mercadolibre, Sprout Social, and Shockwave Medical. Let's take a look.

Mercadolibre (MELI)

Mercadolibre has delivered some of the best business results from any of our selections. Q3 was no exception. Revenues were up 40% year-over-year, with the commerce side leading the way at 45% growth. Several things drove this. Items sold were up 26%, accelerating from +18% last quarter. Fulfillment increased to 48% of orders, up from 40% last year. And ad revenue is taking off, growing 70% year-over-year.

Fintech performed well too, growing 33%. Management believes they have underwriting on the credit card product under control now, and are more aggressively rolling it out. Total payment volume through Mercado Pago was up 70%. The fintech side of the business is attractive, but we should be wary about loss provisions on credit products. This was a problem in the past.

Overall, revenue growth far exceeded my modeling, and free cash profitability (at 32.6% in last 12 months) also far outstrips expectations. Giving the company credit for this (and past) outperformance, a meaningful jump in the fair value estimate is warranted. It gets raised from $1,532 to $1,771. Mercadolibre has been and will likely continue to be a long-term winner.

Sprout Social (SPT)

Sprout Social's earnings were good - sales were up 31%, annual recurring revenue grew 33%, and remaining performance obligations (akin to backlog) grew an impressive 67%. Customers generating over $50,000 in annual recurring revenue grew 49%, and average contract value has more than doubled since 2020. These are all good metrics - we want to see Sprout gaining traction with large firms, as these are easier to expand within and less likely to churn as customers. To that note, some big "new logos" were added in the quarter, including Honda, Activision-Blizzard, and even Mercadolibre!

I continue to like Sprout but there are a few blockers to an investment right now. First and foremost is valuation - the stock still only looks worth low-$30's to me, well below the mid-$40's it trades at. Second is management's head-scratching estimation of a $120 billion addressable market, which just seems outrageously high. Finally, Sprout still isn't generating much cash - only a 3.3% margin in the last 12 months. That's far below the "20-22%" FCF margin the firm is targeting by 2028.

We will keep this one on the Watch List with a fair value of $33.

Shockwave Medical (SWAV)

When Shockwave was added to the Watch List in early April, the stock traded over $270 and we started with a fair value of $183. Today, it trades closer to $170 - down over 30% - but after Q3 earnings, I'm raising the FV to $208! Shockwave has been a case of stock price volatility hiding solid business execution.

Q3 was a good quarter. Sales grew 42% to $186 million, driven by selling more IVL catheters. The rest of the story is just execution, with a new C2+ IVL catheter introduced, and an additional CMS code added that provides physicians with increased reimbursement for IVL procedures. Plenty of growth remains. International sales grew 88% but are still just 1/4th of U.S. sales. IVL has extraordinary advantages over traditional calcification procedures (see the original write-up). Management re-iterated its 49% growth target for 2023.

We've been patient with this one, and now Shockwave has (finally) gotten down to an interesting price. It's getting close to 25% undervalued, and we will be ready to jump in if it does.