MercadoLibre Keeps Falling: Buying Opportunity?

MercadoLibre (NASDAQ: MELI  ) has fallen by almost 40% in the past few months. The economic environment in Argentina and Venezuela is a considerable risk for the company, and investors are concerned about the possibility of increased competitive pressure from Amazon.com (NASDAQ: AMZN  ) and eBay (NASDAQ: EBAY  ) .

On the other hand, the company continues growing strongly and valuation is becoming more attractive as the stock price comes down. Is the fall in MercadoLibre a buying opportunity for investors?

Economic uncertainty
The e-commerce leader in Latin America makes nearly 23% of sales form Argentina and another 14% of revenue from Venezuela. These are also high-growth markets for the company: Revenues in local currencies grew by 66% in Argentina and 98% in Venezuela during the third quarter of 2013.

Both countries are going through a similar economic situation with rampant inflation rates and official exchange rates, which are much lower than the exchange rate in the unregulated -- illegal -- foreign exchange markets. In addition, both countries apply strict limitations to international capital movements.

This means that MercadoLibre accounts for sales and earnings in these countries at the official exchange rate, but the company is not necessarily allowed to take its money outside these countries at such exchange rate. Besides, the official exchange rate in both Argentina and Venezuela has been depreciating rapidly in recent months, and this has a negative impact on financial statements when translated to U.S dollars.

During the Credit Suisse 2013 Technology Conference, management provided some relevant insights about this problem. When it comes to Argentina, the situation is not as complicated as in Venezuela, because there are financial instruments available to move money in and outside the country. Besides, the company's cost structure is in big part nominated in Argentinean pesos, so a currency devaluation in Argentina is a positive for MercadoLibre in terms of costs.

In Venezuela, on the other hand, management has decided to invest in commercial real estate in order to protect the value of its money. MercadoLibre generates enough cash of its own in Venezuela, so the company doesn't need to invest money from outside the country in Venezuela. At this stage, there is no visibility as to when or how the company will be able to repatriate the money it has in Venezuela.

Economic uncertainty is likely to continue weighing on investors' perception of the company in the medium term. However, it's important to keep in mind that MercadoLibre continues growing nicely even when leaving all currency considerations aside; items sold on the platform increased by 25.2% to 22 million in the last quarter.

Competitive pressure
Amazon launched its Kindle store in Brazil in December 2012. The company sells its devices at physical retailers and continues offering only digital products in the country.

Also in Brazil, MercadoLibre's biggest market, eBay has recently began to offer certain localized mobile apps within the fashion category and to promote its cross-border capabilities.

Both Amazon and eBay are bigger and have more financial resources than MercadoLibre, but the local player has the home-team advantage, a widely recognized brand, and the specific know-how to serve local customers and deal with political authorities and regulations.

Growing pressure from Amazon and eBay is certainly a risk to watch in the coming years, but it's no reason to stay away from MercadoLibre at this stage.

The opportunity
MercadoLibre trades at a trailing P/E ratio of 40.4 and a forward P/E of 30.2 times forecast earnings for the next year. This is not a bargain valuation, but it's not excessive for a company that's growing unit sales at more than 25% annually and has big fat profit margins above 30% of revenue at the operating level.

Considering all the uncertainties surrounding the company, it wouldn't be a big surprise if the stock remained under pressure in the coming months. In that case, a falling stock price and growing earnings could provide the opportunity to buy MercadoLibre at a conveniently low valuation for such a profitable growth stock.

Bottom line
MercadoLibre is not dramatically cheap, and economic volatility in Latin America represents a considerable risk for the company in the middle term. On the other hand, this is still a high-growth company with exciting potential for years to come. If MercadoLibre continues falling, it could become a compelling opportunity for investors, so it's definitely a name to watch.

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Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On January 16, 2014, at 10:27 AM, CGMI6 wrote:

    Shitty thing about Venezuela is that yesterday they approved a law of a maximum 30% gain on ANY commercial transaction (and yes, in local currency). Meaning that with only a 30% gain on the sale of Real Estate (which is used my mercado libre as hedge strategy against inflation) and no means to exchange Bolivares to Dollars but via the "ilegal" markets as you put it (meaning black market; there really is no future for an international investor with business in Venezuela, unless he recieves the preferred exchange rate a 6.3 per dollar: if not, its 60 pero dollar.

    The accounting used by Mercado Libre is misleading because they use the 6.3 exchange rate and only businesses related to health and food are the ones who recieve this rate.

  • Report this Comment On January 16, 2014, at 5:18 PM, Westro wrote:

    "Revenues in local currencies grew by 66% in Argentina and 98% in Venezuela during the third quarter of 2013."

    You failed to mention that the actual inflation in Argentina was 9-11% per year and 39-56% per year during that time period, so the real growth rates in real dollars not nominal dollars were: 49.5 - 52% and 26-42% respectively.

    That also does not take into account the fact that they don't even know if they will even be able to repatriate any money from Venezuela at all.

  • Report this Comment On January 16, 2014, at 6:12 PM, piggy60 wrote:

    I sold my MELI at $132, but I still track it. I liked the big dividend, but Venezuela is too much of a liability. I can see this stock dropping back to the the $75 range, especially if the economy stays stagnant. If it does, I may jump back into the fray ... I've bought and sold this stock twice, both times realizing a 20%+ gain, but I'd rather have things in my portfolio that I can buy, look at a year later and see a nice big double digit green number. MELI requires too much of my attention.

  • Report this Comment On January 17, 2014, at 7:07 AM, TMFacardenal wrote:

    Hi Westro

    It´s even worse than that, that 9-11% inflation rate in Argentina is the official government statistic, which nobody believes in. Real inflation was around 28% in 2013.

    If you have have rampant inflation and an artificially low exchange rate, you end up inflating earnings in U.S. Dollars by a considerable margin.

    I think the best way to evaluate the company from a long term perspective is to analyze quantities, not nominal figures.

    Thanks for the comments.

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