This Extraordinary Growth Company Looks Like a Buying Opportunity

MercadoLibre (MELI -1.01%) 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 Amazon.com (AMZN -2.56%) and eBay (EBAY 0.88%) 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.

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.

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.