MercadoLibre Remains a Solid Long-Term Buy

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E-commerce player MercadoLibre (NASDAQ: MELI  ) , better known as the eBay  (NASDAQ: EBAY  ) of Latin America, has fallen off a cliff. Its shares are down 30% in the last six months and the stock is now trading close to its 52-week low. With competition from (NASDAQ: AMZN  ) rising in Latin America, is there a turnaround in sight for MercadoLibre? Let's check.

Bouncing back
MercadoLibre reported some solid numbers in the fourth quarter. The company beat analysts' expectations and shares soared. Revenue for the fourth quarter rose 29.8% to $134.6 million from the year-ago period, while analysts expected it to be around $132.8 million. Operating income rose 33.2% to $52.1 million.

As we see from the numbers, MercadoLibre is growing at a robust pace. It has been able to achieve this growth rate on account of the strategic moves it undertook in the previous quarters. MercadoLibre's focus on the promotion of its payment and shipping solutions to facilitate e-commerce growth will ultimately help it enhance the user experience, both on and off its platform. The enhancement of its mobile and category specific capabilities will also allow MercadoLibre's users to customize its offerings according to trading trends. 

In addition, MercadoLibre's promotion of its open platform will also make its services more accessible to third parties. By following this approach, MercadoLibre expects to become the technology partner of choice for anyone who's thinking of trading online in Latin America.

Growth opportunities and MercadoLibre's moves
A key statistic that investors shouldn't forget is that e-commerce accounts for less than 3% of Latin America's total retail volume. This is the area were MercadoLibre is focusing to tap enormous growth opportunity. The Latin American e-commerce market is expected to grow rapidly in the future. At present, Brazil accounts for almost 60% of the entire e-commerce business in Latin America, and this market is expected to grow by 178% to $22 billion in 2016.

So, MercadoLibre is not wrong in expecting that the accelerated pace at which online retail is penetrating offline retail in Latin America will result in the growth of its business. To tap this growth, the company had launched the MercadoEnvios program last year, and since then, it has gained good traction in the market. MercadoEnvios connects the company's online and offline services, thereby promoting e-commerce in Latin American countries.

The program was initially started in Brazil and then quickly expanded to Argentina, with Mexico next on the radar. In simpler terms, MercadoEnvios is a delivery service that speeds up sales while protecting sellers' data. More importantly, MercadoEnvios connects the company's online and offline services, thereby promoting e-commerce in Latin American countries.

MercadoLibre positions itself as a virtual shopping mall with a variety of products available for its users. Apart from other products, two categories, namely apparel and sports, have grown considerably in the past year. MercadoLibre has attracted big brands to sell their merchandise directly through its online store. With the increasing presence of large retailers on its marketplace, it plans to deploy more official online stores in the upcoming quarters, which will improve its depth and quality of items. 

Management believes that whatever MercadoLibre has achieved till now is just a drop in the ocean. It expects sustained and solid growth in 2014 by driving payments growth through product and technology innovations, and by leveraging its payments brand both on and off its marketplace. In addition, MercadoLibre plans to develop mobile apps with category-specific features that will allow shoppers to have the best possible shopping experience on any screen size.

So, MercadoLibre has been chugging along nicely so far and its growth rate has been fantastic. However, the growing influence of bigger and more established rivals such as Amazon and eBay can slow down the company in the future.

Potential concerns
eBay had entered the Latin American market through MercadoLibre and it agreed that it won't expand into MercadoLibre's core markets. With eBay now holding an 18% stake in MercadoLibre, it would seem that neither would hurt the other. But their agreement expired eight years ago and eBay has the freedom to open up shop in Latin America, as Fool analyst Brian Stoffel wrote last month.

Last year, Bloomberg reported that eBay was going to boost its staff by 50% in the emerging markets. eBay could follow a tried-and-tested approach of releasing a mobile app before launching a desktop website. Hence, eBay's threat shouldn't be ruled out.

Meanwhile, Amazon is intent on making a mark in Brazil. As mentioned earlier, Brazil is expected to be the biggest driver of the Latin American e-commerce market. It is quite obvious that Amazon won't leave this opportunity and recently started selling the Kindle online in Brazil. With this move, Amazon has expanded from selling e-books to retail for the first time in Brazil. 

Since MercadoLibre gets 44% of its revenue from Brazil, Amazon's move is a concern for the company. However, MercadoLibre has already established a strong foothold in this market and has experience of dealing with local logistics problems. Amazon, on the other hand, hasn't had any experience with the logistics problems that are prevalent in Brazil, such as transport of goods, infrastructure problems, and long distances.

So, while Amazon is a threat, it isn't a big enough one right now.

Bottom line
MercadoLibre's shares have taken a good beating in recent times. The company's business, however, is growing strongly and it is employing several strategies to tap the Latin American e-commerce market. While there are possible threats, MercadoLibre is established in Latin America and has an upper hand over newcomers. Foolish investors should keep an eye on MercadoLibre going forward.

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8/28/2015 4:00 PM
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MercadoLibre CAPS Rating: ****