After a stellar first-quarter earnings report, Latin American e-commerce leader Mercadolibre, Inc. (NASDAQ:MELI) had been riding the tailwinds of its success. The stock had risen an incredible 100% year-to-date on the back of the region's growing adoption of online sales and the company's leadership position in the space.
The market wasn't at all pleased with the results, sending the stock down near 10% as of this writing. The results improved on recent results in many key aspects, so what is causing investors flight from the stock? Read on to find out what happened and why I think the market got it wrong.
Numbers that showed continued operational excellence
Since MercadoLibre operates in numerous Latin American countries but reports in U.S. dollars (USD), the raw numbers can at times be misleading. A review of several operational metrics that strip out the effect of foreign currency translation can help provide context.
The company's confirmed registered users increased 21% year over year to 191 million, continuing a long history of such growth going back more than five years. Items sold grew to 61.5 million, a 63% increase over the prior-year quarter and an improvement from the 39% increase last quarter. Payment transactions grew a blistering 63% year over year to 52 million. These numbers illustrate that MercadoLibre continues to execute at a high level.
Financial metrics concur
There were numerous other metrics equally as impressive. Gross merchandise volume of $2.72 billion was up 35.8% in USD and 55.6% in constant currency over the prior-year quarter. Total payment volume jumped to $3.15 billion, year-over-year growth of 73.5% in USD and 76.1% in constant currency.
Looking at the main financial metrics, MercadoLibre saw revenue that increased to $316.5 million, up 58.5% in U.S. dollars and 64.7% in constant currency. Gross profit for the quarter of $171.6 million represented gross margin of 54.2%, compared with 63.3% from the prior-year quarter. The company recently introduced free shipping on certain items in Brazil and Mexico that compressed margin but will increase market share over the longer term.
This was the culprit
Net income of $5.3 million decreased substantially from $15.8 million in the prior-year quarter. The culprit was the continuing devaluation of the bolivar, Venezuela's currency. In the earnings press release, MercadoLibre provided a detailed explanation (emphasis mine):
The company adopted the DICOM floating exchange rate in Venezuela as of June 1, 2017. As of such date, the DICOM Exchange rate was 2640 BsF [bolivars] per U.S. dollar as compared to 709BsF per U.S dollar using the SIMADI exchange at the end of the first quarter. As a result, the company recorded a $24.8 million loss in the quarter that includes an impairment charge on long-lived assets of $2.8 million and a forex loss of $22.0 million, which was partially offset by deferred income tax gains of $3.2 million.
A couple of important points. First, the issues with the Venezuelan bolivar are well documented and have been ongoing for nearly a decade. Even while dealing with currency issues, inflation, and economic and political turmoil, MercadoLibre has persevered and its stock has climbed over 800%.
It really wasn't that bad
Additionally, write-offs of this type are typically discounted for the sake of comparisons with previous results. Factoring out the net $21.6 million loss would have resulted in net income of $26.9 million, far better than the $15.8 million in the prior-year quarter.
Venezuela accounted for only 4.5% of MercadoLibre's revenue and 10% of its profits for the quarter, even after the write-down, which accounts for the drop in the stock price. History has shown that these movements are typically short-lived, and investors will soon return their focus to the company's operational excellence and nearly flawless execution.
Nobody likes to see a stock they own fall 10%, but in this case, the market is being shortsighted, providing an opportunity for long-term investors to prosper.