These are all fantastic businesses, but I can’t quite get past the fact that so much of their recent profitability and margin expansion is being driven by the massive scaling of their loan books.
They are operating in developing markets with historically volatile currencies and macro environments. My worry is that the only reason they appear cheap is because of the claim that due to the growth rates they should have tech like PEs but to achieve the growth rates and margin expansion they are taking on more and more risk.
I’ve heard the idea that legacy banks rely on outdated credit scores, whereas MELI and SE have real-time data on their merchants/consumers but is real-time data really enough to protect them in a credit crunch or global recession?
Even if they can see a merchant's sales dropping in real-time, if an emerging market economy enters a severe recession, defaults are going to spike regardless of how good the algorithm is. Because these loans are priced with high margins, they might not go bankrupt, but they would have to radically pull back and massively increase provisions for credit losses.
If credit growth stalls, the margin expansion vanishes, and the multiples on these stocks will violently contract.
For those holding these names:
Are you just accepting the risk because the current growth is so good?
What specific Non Performing Loan ratio or margin compression signal would force you to sell?