Until recently, it seemed MercadoLibre (MELI -1.01%) could do no wrong. The company was reporting enviable financial and operational metrics, and the stock was hitting all-time highs. Then, something happened on the way to the online sale.
The looming threat of a large competitor entering the region, a significant increase in local postal rates, and a revised accounting standard conspired to knock MercadoLibre from its lofty perch, with the stock sinking 43% from its recent highs.
As a longtime shareholder, I've seen this movie before, and I think it's time to get greedy with MercadoLibre stock.
Image source: Getty Images.
Much ado about nothing
Investors have become accustomed to MercadoLibre putting up significant year-over-year revenue growth quarter after quarter. However, a recent change to the presentation of financial statements made it appear as if MercadoLibre's growth had taken a severe hit. Rather than the 66% year-over-year growth the company had generated, on average, in each of the previous four quarters, revenue growth suddenly plummeted to 19% compared to the prior-year quarter.
The culprit? A simple accounting change that required MercadoLibre to deduct the cost of free shipping incentives from its top line, where previously it was deducted from cost of goods sold. Under the previous standard, year-over-year growth in the first quarter would have clocked in at a much more palatable 58% in U.S. dollars -- or 70% in local currencies. It's important to note that this change affects only presentation, and nothing has materially changed about the business -- the bottom-line results remain the same.
The postman cometh
Another factor that spooked investors were massive price hikes by Correios, Brazil's national postal service, pushing up shipping costs by as much as 51%. Brazilian e-commerce association ABComm won a temporary injunction that limited the increase to 8%. It remains to be seen how that case will ultimately be decided.
Pedro Arnt, MercadoLibre's CFO, pointed out that even if the increase is upheld, much of it will be passed on to customers and vendors. He also said that an unintended consequence of the situation was greater adoption of the company's shipping solution, MercadoEnvios, as well as its logistics option, Fulfillment by MercadoLibre.
In the end, this might be a long-term win for the company.
The elephant in the room
Over the past year, there have been persistent rumors that Amazon.com (AMZN -2.56%) was preparing for a major push into MercadoLibre's backyard. The company has been selling books via its website in Brazil, but until recently, that was all. Late last year, other items, like electronics, video games, and appliances appeared on Amazon's online marketplace in Brazil.
Image source: Getty Images.
Amazon's entry into the market doesn't necessarily mean it will win there. Adoption of online sales in Latin America is at least a decade behind the U.S., and consumers in the region are still cautious about making e-commerce purchases, often sticking to familiar local names. Brazil is also a quagmire of complex regulations and a notoriously difficult business environment.
While bank accounts and credit cards are taken for granted in the U.S., much of Latin America is still cash-based. There are estimates that 70% of consumers don't have a bank account, and depending on the country, only between 20% and 50% of the population has a credit card. Finally, while Amazon is known for its 2-day and faster shipments in its U.S. market, the infrastructure in Brazil is much different, with deliveries sometimes taking a week or more -- and there is a growing threat of hijacked cargo trucks -- an increasingly common occurrence in Brazil.
While Amazon can never be taken lightly, it is also important to remember that it's been in the region for more than five years, competing directly in markets like Mexico, Chile, and Columbia, yet MercadoLibre has been able to hold its own against the online juggernaut -- and continue its massive growth.
It's also important to note that Amazon has struggled to replicate the degree of success it has achieved in the U.S. market -- being bested by Flipkart in India and a host of online competitors in China. While it bears watching, there are no guarantees that the company will do any better against an entrenched local champ like MercadoLibre.
A buying opportunity
As illustrated above, nothing has really changed regarding MercadoLibre or its long-term opportunity in Latin America. The change in accounting regulations changes only how the numbers are presented, the postal rates may (or may not) ultimately increase -- and it may help drive greater adoption for the company's logistics and shipping solutions. It remains to be seen whether Amazon will pose any significant threat to the hometown favorite.
Operationally, MercadoLibre continues to excel, growing its user base by 22%, items sold by 50%, and payment transactions by 68%, all year over year, in its most recent quarter.
With all of those things considered, I believe MercadoLibre will continue to enjoy the home field and first-mover advantage in its native Latin America. The massive sell-off of the stock is overdone and represents a buying opportunity for investors with a longer time frame.
