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MercadoLibre, Inc. Shares Were Decked Following This Report -- Here's Why

By Sean Williams - Oct 12, 2017 at 3:28PM

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Amazon's moat may be expanding, and that's potentially bad news for MercadoLibre.

What happened

Shares of MercadoLibre (MELI -2.04%), an online commerce platform throughout Latin America, plunged as much as 12% during Thursday's trading session, after a report surfaced that (AMZN 0.14%) may expand its presence in Brazil.

So what

Chalk up another company that's been "Amazoned." According to Brazilian newspaper Valor Economico, Amazon may be gearing up to launch into new markets in Brazil within the week. Its launch could include books and electronics, although the product categories it caters to could grow in the months to come.

A woman holding a credit card and making a purchase on her laptop.

Image source: Getty Images.

Goldman Sachs analyst Irma Sgarz has suggested that Amazon's push into Brazil would have margin-negative impacts for MercadoLibre and other e-commerce companies operating in the country. Sgarz believes market share and gross merchandise volume would decrease, and that companies like MercadoLibre would have to offer incentives such as free shipping to attract consumers. In particular, Sgarz litsts MercadoLibre's electronics market share as being at the greatest risk from Amazon's expansion. 

Now what

This marks the second time in just over two months that MercadoLibre shareholders have been clobbered by unwelcome news. In August, shares of MercadoLibre fell by a double-digit percentage after disappointing second-quarter results. Despite 59% sales growth, which topped expectations, the company's adjusted EPS of $0.61, a 16% increase from the previous year, missed consensus estimates by almost 40%.

An Amazon package laid against a door for delivery.

Image source: The Motley Fool via Flickr.

What makes Amazon's entrance so noteworthy is that, based on a constant currency basis, Brazil has consistently been MercadoLibre's fastest-growing market. Sales grew in Brazil by a respective 41%, 76%, 92%, 106%, and 75% over the past five quarters (beginning in Q2 2016 through Q2 2017). Therefore, margin contraction in Mercadolibre's prime market could steal some of the company's growth thunder and force Wall Street to lower growth expectations.

However, you shouldn't count on MercadoLibre just yet, according to my Foolish colleague Danny Vena. The company's cross-docking capabilities in Argentina, Brazil, and Mexico, which improves the efficiency of receiving product and sending that product out to the consumer, along with its MercadoPago payment platform, provide value beyond just its e-commerce platform. There are still plenty of channels available for MercadoLibre to grow. 

The big question at this point is just how well the company is able to defend its turf against a company with pockets as deep as Amazon. Only time will tell.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.

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