MercadoLibre Still Faces a Tough Road in Latin America

Image source: MercadoLibre.

Investing in foreign companies typically carries a bit more risk for U.S. investors than in domestic stocks, as different economic conditions in various regions of the world can have effects on foreign companies that U.S. investors won't necessarily see firsthand.

Latin American online marketplace specialist MercadoLibre (MELI -1.96%) has faced huge headwinds from the economic struggles that key markets like Brazil and Argentina have had to go through lately, and even though many aspects of the company's fundamentals look strong, MercadoLibre's ability to produce bottom-line growth has been hampered by the limitations of its home economies.

As investors prepare for the company's third-quarter financial report on Wednesday, MercadoLibre will have to show that it can overcome local difficulties and keep focusing on making the most of the opportunities it has. Let's take an early look at what you can expect to see in MercadoLibre's report.

Stats on MercadoLibre

Image source: Yahoo! Finance.

What's next for MercadoLibre earnings?
In recent months, investors have gotten a lot less confident about MercadoLibre earnings, cutting more than a dime per share from their third-quarter estimates and reducing projections for the full 2015 and 2016 years by roughly 15%. The stock has continued to drop precipitously, losing more than 25% of its value since late July.

The results that MercadoLibre posted in its second-quarter report demonstrate the difficulty that the company has had in turning top-line growth into greater profitability. Revenue climbed by 17%, but currency devaluations and other negative impacts kept those gains from showing up on the earnings front. Net income fell nearly 40% from year-earlier levels, disappointing investors who had expected MercadoLibre to hold up better.

Operationally, MercadoLibre continues to fire on all cylinders. In addition to the company's namesake marketplace, ancillary services are performing well. MercadoPago has seen much of the same success as its U.S. counterpart PayPal (PYPL -1.67%), and MercadoLibre has seen opportunities for its electronic payment division that mirrors how PayPal went beyond simply being a facilitator for online marketplace transactions to encompass a wider swath of the payments industry more broadly. Similarly, delivery service MercadoEnvios is getting more widespread use across MercadoLibre's key geographical areas, reflecting the extent to which the company is facilitating e-commerce for merchants and buyers alike.

MercadoLibre clearly has a huge long-term opportunity. The level of e-commerce activity in Latin America remains much lower than in the U.S., and MercadoLibre faces less competition than its counterparts in North America. Similarly, electronic payments account for a small part of overall business transactions, leaving the field open for MercadoPagos to do what PayPal has done and claim its share of the money-movement market.

Still, the big wild card is whether the Brazilian and Argentinian economies will continue to sputter and cause potential problems for MercadoLibre. To try to offset its exposure to those two areas, MercadoLibre has worked hard to boost its presence in other markets like Mexico, Chile, and Colombia, and the wider its influence becomes, the less it will rely on any one national market. Nevertheless, with so many interrelated elements to the Latin American economy, MercadoLibre's performance will likely remain correlated to how well the regional economy does on the whole. Moreover, as long as strength in the U.S. dollar persists -- especially against the plunging Brazilian real -- MercadoLibre will feel the pressure on both revenue and earnings.

In the MercadoLibre report, investors should look at the impact that tough economic conditions are having on the company's key fundamental performance. Most investors expect to see considerable growth once you take out the impact of currency, so anything other than that level of success could raise red flags for MercadoLibre going forward.