What happened
Shares of MercadoLibre Inc (MELI 1.96%) were roaring higher today after the Latin American e-commerce specialist posted a strong third-quarter earnings report. As of 11:17 a.m. EDT, the stock was up 10.1%.
MercadoLibre posted blistering revenue growth of 60.6% to $370.7 million, which crushed estimates of $347.7 million. On the bottom line, profits actually fell as expected as the company expands free shipping, and sales and marketing expenses more than doubled. Earnings per share slipped from $0.88 to $0.63, but that still topped estimates by a penny.
Image source: Getty Images.
So what
Investors cheered the strong revenue growth as that appears to be the best sign yet that MercadoLibre is executing on its strategy. As the company invests in free shipping and increased marketing, revenue growth is accelerating from just 29.6% last year. That spending is eroding margins however, as gross margin fell from 63.1% all the way to 47.4%. That's still a strong number for a retailer as MercadoLibre benefits from its marketplace model, but it could be a cause for concern if it keeps falling.
CFO Pedro Arnt summed up the quarter, saying, "Mercado Libre is now positioned more clearly than ever as one of the central engines of the digital revolution of the retail and fintech landscape in Latin America. In many ways, this quarter has been our best this year so far, and we are delighted to witness firsthand how the company is executing against the ambitious set of goals it has set forth."
Now what
MercadoLibre did not issue guidance for the current quarter, but the momentum from the current period seems likely to carry over into the fourth quarter. I'd expect analysts to raise their revenue growth estimates after last night's report.
MercadoLibre's recent growth may be the best sign yet that the company can survive the potential threat from Amazon, which announced a few weeks ago it would begin selling electronics in Brazil, MercadoLibre's biggest market, and is likely to expand into other categories. That appears to be more of a long-term threat for now, and MercadoLibre's strong sales growth should offer reassurance. Still, investors should be mindful of ongoing margin compression.
