Recent earnings disappointment creates a chance to invest in MercadoLibre stock
- MercadoLibre is the No. 1 online retailer in Latin America
- Recent earnings “disappointment” has created a buying opportunity
- Earnings per share more than doubled last year
- Gross merchandise volume and total payment volume rose significantly
- Tax charges and decline in gross margins caused stock slump
- Tax expenses were a one-time hit and margins were sacrificed for market share
- MercadoLibre has the ability to succeed where others haven’t
- Huge growth potential as e-commerce penetration increases in Latin America
- Invested heavily in business capabilities and outperformed competitors
- Leading e-commerce platform with a robust fintech business
Investors looking for an alternative to the Magnificent Seven could do worse than MercadoLibre —and a recent earnings “disappointment” has created a buying opportunity in the stock of Latin America’s dominant online retailer. There’s a lot to like about this e-commerce and fintech powerhouse. If the 218 million users of MercadoLibre (MELI) all lived in one country, it would be the most populous in Latin America. The company’s earnings per share more than doubled last year and are expected to climb 80% in 2024. But that didn’t stop MercadoLibre from slumping 10% after reporting earnings on Feb. 23, its largest decline in two years. The Montevideo, Uruguay-based company reported a profit of $3.25 a share on revenue of $4.3 billion. Gross merchandise volume and total payment volume—two key e-commerce and fintech metrics—rose 40% and 57%, year over year, respectively. Investors, however, were concerned with a decline in gross margins, and tax charges meant income was well below analysts’ predictions. That seems like an overreaction—and a buying opportunity. The tax expenses, without which MercadoLibre would have easily beaten expectations, were a one-time hit, while the company had always planned to sacrifice some margins to pick up market share. “We gladly take [volume] strength over a little messiness on the margin line…and we are buyers on this weakness,” noted BTIG analyst Marvin Fong, who thinks the stock should trade to $1,885, up 23% from Tuesday’s close of $1,527.29. The case for MercadoLibre starts with its ability to succeed where others haven’t. Amazon. com is the 800-pound gorilla in e-commerce, but Brazil, Argentina, and Mexico—MercadoLibre’s main markets—are small potatoes for the behemoth. That makes it less of a competitive threat to MercadoLibre. Other smaller entrants in the Latin American e-commerce market have had mixed success; that—along with a more tumultuous economic backdrop—may make the region less attractive to low-cost Asian marketplaces like Temu that have made inroads in the U.S. Yet MercadoLibre has been able to not just survive but thrive amid these ups and downs, helped by the fact that e-commerce penetration is only about 10% in Latin America—well below the U.S. and other developed nations, as well as China. That means there’s a huge runway for growth in Latin American as commerce penetration increases, regardless of the economic backdrop. MercadoLibre has also invested heavily in its business capabilities in recent years—the company’s roughly $500 million of capital expenditures last year came entirely from its cash flow—and is now reaping the rewards as many rivals retreat from the region. “MercadoLibre has consistently stayed ahead of the competition over the past five to seven years, and they have largely fallen by the wayside,” says Ramiz Chelat, portfolio manager for Vontobel’s Quality Growth Boutique, which owns shares in the e-commerce company. “It’s gone from a five-player market to now effectively a two-player market, with MercadoLibre in the No. 1 position and Amazon somewhere behind them.” Nor is MercadoLibre competing with physical stores the way Amazon does in the U.S. In many cases, it sells products that consumers can’t buy anywhere else, unlocking new categories of spending. “If you are the platform that offers the widest selection and wide range of merchants at attractive pricing, as MercadoLibre does…it becomes a positive feedback loop,” says Chelat. MercadoLibre isn’t only the leading e-commerce platform in Latin America, but also sports a robust fintech business, which now accounts for nearly half of revenue. It serves a huge unbanked population, one that is skipping traditional credit cards and going straight to digital payments, much like many emerging market consumers leapfrogged over landlines to go straight to cellphones. As a result, customers are using its payment platforms even when they aren’t shopping on MercadoLibre’s website. MercadoLibre stock has risen 25% over the past year, but fans say it remains a compelling buy. MercadoLibre “has created a powerful ecosystem of complementary services that will be hard for competitors to replicate and that positions the company for solid growth ahead,” says Pawel Wroblewski, portfolio co-manager of the ClearBridge International Growth Fund (LGGAX), which owns the stock. “The magnitude of its future growth is mispriced.” The company trades at a lofty 44 times 12-month forward earnings. While that’s more than double the S&P 500’s valuation, it’s near MercadoLibre’s lowest level since 2017. The company’s balance sheet also looks strong, as it has a net cash position of nearly $4 billion, and generated $2.4 billion in profit from operations on a currency neutral basis last year, up 134%. “Like a lot of great companies, MercadoLibre has had a good rebound but it’s not expensive,” says Mark Baribeau, Global Equity Portfolio Manager at Jennison Associates, which owns shares in the e-commerce company. “The 2024 outlook is very healthy so we don’t think anyone’s missed the stock.” There’s still time to go shopping for MercadoLibre stock.
Factuality Level: 2
Factuality Justification: The article is heavily biased towards promoting MercadoLibre stock as a good investment opportunity. It contains a lot of opinionated statements presented as facts, such as ‘There’s a lot to like about this e-commerce and fintech powerhouse’ and ‘MercadoLibre has consistently stayed ahead of the competition over the past five to seven years.’ The article lacks objectivity and critical analysis, focusing more on promoting the company rather than providing a balanced view of its performance.
Noise Level: 3
Noise Justification: The article provides a detailed analysis of MercadoLibre, Latin America’s dominant online retailer, discussing its recent earnings, growth potential, competitive landscape, and financial performance. It offers insights into the company’s strengths, weaknesses, and future prospects, supported by data and expert opinions. The article stays on topic and provides actionable insights for investors interested in the stock.
Financial Relevance: Yes
Financial Markets Impacted: The stock of MercadoLibre, Latin America’s dominant online retailer, is discussed in the article.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article discusses the recent earnings report of MercadoLibre and the buying opportunity it presents for investors. There is no mention of any extreme events or events impacting financial markets.
Public Companies: MercadoLibre (MELI)
Key People: Marvin Fong (Analyst at BTIG), Ramiz Chelat (Portfolio Manager for Vontobel’s Quality Growth Boutique), Pawel Wroblewski (Portfolio Co-Manager of the ClearBridge International Growth Fund (LGGAX)), Mark Baribeau (Global Equity Portfolio Manager at Jennison Associates)
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