MercadoLibre Keeps Falling: Buying Opportunity?

MercadoLibre has fallen by nearly 40% in the past few months. Is the e-commerce leader in Latin America a buying opportunity?

Jan 15, 2014 at 7:39PM

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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Fool contributor Andrés Cardenal owns shares of Amazon.com The Motley Fool recommends and owns shares of Amazon.com, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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