Why MercadoLibre Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Latin American e-commerce company MercadoLibre (NASDAQ: MELI  ) fell as much as 12.7% on Wednesday on the back of yesterday afternoon's announcement of third-quarter results, which missed analysts' forecast for earnings per share by 10% ($0.66 vs. $0.73).

So what: In addition to the earnings miss weighing on the stock, Pacific Crest Securities downgraded MercadoLibre from outperform to sector perform in a report published on Wednesday. Pacific Crest justified the downgrade on the following basis:

MercadoLibre is a leader in Latin America, but the risk/reward is unfavorable. We are downgrading our rating on MELI to Sector Perform. After the strong YTD performance for MELI, we see limited upside to shares. In addition, after peak growth in Q4, we expect growth to slow throughout 2014, which could pressure the stock's multiple, similar to 2012. We see downside risk to roughly $98 to $114 (30x to 35x P/E).

Now what: Trading at 40.5 times the next 12 months' earnings-per-share estimate prior to today's correction, MercadoLibre's stock clearly sports a growth stock's premium multiple (although that is nothing by comparison to the multiples that can be found in some segments of the technology sector right now). As such, I would agree with Pacific Crest that the stock is vulnerable to additional volatility over the next 12 months or so. However, for long-term investors with a bent for growth, the current price doesn't look like an absurd entry point, particularly if MercadoLibre can sustain its superb growth record over the next several years.

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Related Tickers

9/27/2016 4:00 PM
MELI $187.50 Up +0.65 +0.35%
MercadoLibre CAPS Rating: *****