Q2 Updates: PAYC, YOU, MELI

A lot of our portfolio and watch list stocks reported earnings last week! At a glance, I haven't seen any thesis-altering events from any of them - just small tweaks to our fair value estimates. Let's start by looking at Paycom, Clear Secure, and MercadoLibre.

Paycom (PAYC)

Paycom's Q2 2023 results looked respectable. Reported revenue was $401 million, up 27% from the previous year. Operating margins held largely steady, although free cash flow was strong this quarter at $78 million, a 19.5% margin vs. 9.2% a year ago. Management mentioned they are attempting to increase their overall addressable market by targeting larger North American companies with both domestic and foreign employees - in addition to their traditional strengths servicing smaller companies.

Paycom is just an incredibly steady and predictable firm, I was pretty shocked to see the stock price fall by over 25% after this report. There is no clear justification for that. In fact, I'm raising the fair value a price a bit to $330.

Clear Secure (YOU)

Some bad press has hurt Clear Secure's stock recently, but very strong Q2 earnings led to a rebound later in the week. Regarding the Bloomberg report, I felt Clear issued a strong response, and don't see any major long-term damage coming out of the article. In fact, TSA and Clear continue to work towards numerous partnerships, including selling TSA PreCheck through Clear and working on "next-gen", "friction-free" security experiences.

Onto the numbers. Sales were up 46%, bookings (future sales) were up 43%. Total enrollments grew 33%, while paying members increased 46% to 6.2 million. Retention was 90.7%, which is above our (and management's) long-term expectation of high 80% range. This is all 8 quarters out from COVID-related travel weakness... this company is clearly growing rapidly at an organic rate now.

Clear's financial management has always impressed me, as well. The firm gushes free cash flow, about $71 million in the quarter at a splashy 47.3% margin. Management used some of that to repurchase 1.5 million shares at about $25/share, which is over 35% below our fair value price. Additionally, Clear is instating a $0.07 quarterly dividend, yielding 1.1% annually at current share prices. All of this still leaves plenty of capital to chase new growth avenues, such as a partnership with LinkedIn, TSA PreCheck sales, and longer-term opportunities in healthcare and finance (among others).

I'm still a big fan of the company and its management. We will hold steady on the $41 fair value estimation. The stock continues to look like a good buy presently.

MercadoLibre (MELI)

MercadoLibre has been another strong performer for us since recommendation, and Q2 was no different. Net sales grew 31% as reported, but 57% when normalizing for the various currencies the firm deals in (Brazilian reals, Mexican and Argentine pesos, and others). Both the commerce and fintech side showed excellent results. In commerce, gross merchandise volume grew 47%, items sold increased 18%, and items shipped were up 21%. In fintech, total payment volume grew 97% (including 129% outside of the firm's own marketplaces), and total transactions were up 69%. Just extremely strong results across the board.

Similar to Clear, the news holding down MercadoLibre over the past few months has been the continuing decline in the value of the Argentine peso. It is a fair concern - Argentina is Mercado's 3rd largest geography, accounting for over 20% of sales. Management offered a lengthy explanation that I don't want to get into here (it has to do with cash swaps and hedging, etc.), but essentially they feel that the exchange rate loss reported with Q2 results largely incorporates the impact of the Argentine crisis. In any case, Mexico has now passed Argentina as the company's 2nd largest country, so this effect will likely abate going forward. In short, this doesn't look to be an explosive, unattended risk to the firm's overall results.

MercadoLibre continues to live up to its billing as the "Amazon and PayPal of Latin America". I'm giving the fair value estimate a healthy bump up to $1,532. The stock looks reasonably undervalued at present.

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