This Extraordinary Growth Company Looks Like a Buying Opportunity

The recent dip in this extraordinary growth company looks like a buying opportunity for strategic long-term investors who are not afraid of withstanding some volatility in the short term.

Apr 10, 2014 at 1:30PM

MercadoLibre (NASDAQ:MELI) is down by nearly 35% over the last six months. Economic headwinds in Latin America are affecting the company lately, and competitive pressure from bigger players such as (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) is always a variable to monitor.

However, MercadoLibre is still generating rock-solid performance for investors, and the company is well positioned for sustained growth in the years ahead. Is the recent decline in MercadoLibre a buying opportunity for investors?

The business
MercadoLibre is usually called "the eBay of Latin America," and there are valid reasons for this comparison: eBay owns nearly 18% of MercadoLibre, and both companies have similar business models, integrating an e-commerce platform and other businesses such as digital payments, online advertising, and technological solutions for clients.

MercadoPago plays a similar role for MercadoLibre to the one PayPal plays for eBay, a payment method which is expanding beyond the e-commerce platform and becoming a business opportunity on a stand-alone basis.

Meli Image

Source: MercadoLibre.

On the other hand, MercadoLibre is in a far more comfortable competitive position than eBay, because the company does not face the same kind of competitive pressure from Amazon.

Amazon is well-known for its aggressive competitive drive and its willingness to operate with razor-thin -- or even negative -- profit margins when it comes to competing for market share. In Jeff Bezos' own words: "Your margin is my opportunity." 

Amazon launched its Kindle store in Brazil in December 2012; the company sells its devices at physical retailers and offers digital products in the country. Also in Brazil, MercadoLibre's biggest market, eBay recently began offering certain localized mobile apps within the fashion category and advertising its cross-border capabilities.

Amazon and eBay are both bigger and have more financial resources than MercadoLibre, and it wouldn't be a big surprise to see these companies expanding their presence in Latin America in the medium term.

However, it won't be easy for Amazon or eBay to displace MercadoLibre. 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.

Besides, management estimates that e-commerce currently accounts for less than 3% of total retail transactions in Latin America. As consumers become more familiar with online commerce in the coming years, the industry should provide enough room for MercadoLibre, Amazon, and eBay to profit from a growing market at the same time.

Volatility and opportunity
Economic uncertainty and currency devaluations in Venezuela and Argentina are creating considerable headwinds for MercadoLibre lately, as these are big markets for the company: MercadoLibre makes approximately 23% of its sales form Argentina and another 14% of its revenues from Venezuela.

But the company is still generating outstanding financial performance for investors in spite of these difficulties. Local currency sales grew by an explosive 49.7% during the fourth quarter of 2013; currency fluctuations were a drag during the period, but sales measured in U.S. dollars still increased at a remarkable rate of 29.8% versus the prior year to $134.6 million.Meli Image

Source: MercadoLibre.

Items sold on MercadoLibre during the period increased 20.1% to 22.8 million, while total payment transactions through MercadoPago increased 33.8% to 9.0 million, so the company is delivering substantial growth rates when looking at operational metrics and leaving all monetary effects and currency considerations aside.

Earnings per share during the quarter came in at $0.93, a 35% increase versus the same quarter in 2012 and comfortably above Wall Street analysts' estimate of $0.77 on average for the quarter.

If this is the kind of performance MercadoLibre can deliver while facing macroeconomic headwinds, then the company should generate truly spectacular results when the wind is at its back.

It's hard to tell how the economic situation in Latin America may evolve in the coming months. However, MercadoLibre trades at a forward P/E ratio of 26 times earnings estimates for 2015, quite an attractive valuation for such a promising growth company. To a considerable degree, economic concerns seem to be reflected in MercadoLibre's valuation at this stage.

Bottom line
Economic headwinds could be a drag on performance during the coming quarters, and competitive pressure from bigger companies such as Amazon and eBay is always a risk to watch in the long term. However, MercadoLibre is generating extraordinary performance through challenging economic conditions, and the company has enormous room for growth in the years ahead. The recent dip in MercadoLibre looks like a buying opportunity for investors.

3 stocks poised to be multibaggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multibagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Andrés Cardenal owns shares of The Motley Fool recommends and owns shares of, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers