I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.
Next up: Mercadolibre (Nasdaq: MELI ) . Is this South American online marketplace operator the real thing? Let's get right to the numbers.
|CAPS stars (5 max)||****|
|Bullish pitches||133 out of 150|
|Highest rated peers||On2 Technologies, Spark Networks, PHOTOCHANNEL NETWORKS|
Data current as of Nov. 26.
For the most part, Fools like Mercadolibre. They appreciate not only its growth but also its competitive position as Latin America's answer to eBay (Nasdaq: EBAY ) -- a position that has helped the stock return more than 350% since joining the Rule Breakers scorecard in March of 2009.
"Lacks competitors in Spanish speaking market in Mexico, Argentina, and the rest of Latin America. Increasing revenues being only a couple years into cycle. Look for continued growth [as the] Pago platform is very successful. American firms cannot duplicate local knowledge of how business runs with Latino consumers," wrote Foolish investor HighOnChina earlier this month.
Local knowledge has always been key to the thesis for Mercadolibre, and it's paid off via the virtual monopoly HighOnChina refers to. But you wouldn't know that from the valuation. With a 1.3 PEG ratio, Mercadolibre trades for a decent but by no means outrageous premium to the long-term growth analysts expect.
The elements of growth
Last 12 Months
|Normalized net income growth||67.6%||36.2%||117.5%|
|Shares outstanding||44.1 million||44.1 million||44.1 million|
Source: Capital IQ, a division of Standard & Poor's.
Looking at this table, I can see why Wall Street has been optimistic. But now may be the time for caution. Let's get into the numbers:
- Both revenue and normalized net income are up over last year but down from 2008. That's not necessarily a bad sign, but it speaks to the unpredictability of the underlying business.
- Gross margin has declined steadily, not a good sign in that it suggests that whatever pricing power Mercadolibre has could be eroding. eBay has battled a similar problem in recent years.
- More troubling is that receivables are now growing much faster than revenue, a sharp reversal from 2008. Free cash flow is up marginally over the same period. (From $50.9 million in 2008, to $53.3 million over the trailing 12 months.)
- The good news? Mercadolibre is self-funded and doesn't need to issue shares.
Competitor and peer checkup
Normalized Net Income Growth (3 yrs.)
|Amazon.com (Nasdaq: AMZN )||40.6%|
|Google (Nasdaq: GOOG )||24.1%|
|Microsoft (Nasdaq: MSFT )||9.3%|
Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 26.
Mercadolibre is clearly the big grower in this table; not even Amazon gets close. Still, I find the comparison to eBay worrisome. If gross margins are declining now, what happens when competition gets tougher? Will new entrants disrupt Mercadolibre the way Craigslist has obviously disrupted eBay?
I wish I knew for sure, but it seems likely. And yet you could say this same thing about a number of our very best Rule Breakers picks. If I'm loath to bet against Mercadolibre, it's because I'm a member of that team and a student of business history. What looks weak sometimes isn't. Multibaggers are created where such misunderstanding exists.
Now it's your turn to weigh in. Do you like Mercadolibre at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.
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