Shares of Latin American e-commerce and fintech leader MercadoLibre (NASDAQ:MELI) declined 19.8% in November, according to data from S&P Global Market Intelligence. While MercadoLibre reported third-quarter earnings during the month, that doesn't seem to be the culprit behind the fall, as the stock rose immediately after reporting.
Rather, an unexpected mid-month equity offering started the decline, which was later accentuated by a sharp drop in growth stocks brought on by tightening financial conditions.
In early November, MercadoLibre reported earnings that showed strong growth. Revenue was up 66.5% in U.S. dollars, and earnings per share came in at $1.92, up 586% over the prior year, although that was off a tiny base. While revenue growth came in just shy of expectations, the bottom line beat expectations handily, and the stock rose on the news.
However, it fell shortly thereafter, following news that MercadoLibre would be selling 1 million shares at a price of $1,550, for a total raise of $1.55 billion. The company only said proceeds would be used for "general corporate purposes." Investors may have been scratching their heads as to why MercadoLibre felt the need to raise money by selling stock that had already fallen by about 25% from highs at the time.
The company did say on the recent conference call with analysts that it would be expanding its credit book to both businesses and consumers. The credit portfolio was already up a large 296% over the prior year. That could be the reason for the recent capital raise, and also a cause for concern. Inflation is a problem in many countries, but especially in Brazil and Latin America, which caused a decline in MercadoLibre's stock last month as well. Higher inflation combined with the new omicron variant could lead to deteriorating financial conditions -- not the best environment in which to be increasing your credit exposure.
A final flush came later in the month as growth stocks became pressured amid the prospect of higher interest rates. Higher rates mean future earnings are discounted more, and MercadoLibre, though profitable, still makes very low profit margins today as it invests in its logistics footprint and expands its product set. After this month's decline, the stock is down nearly 50% from all-time highs set earlier this year.
A top-quality stock like MercadoLibre being down 50% should definitely put it on investors' buy lists; however, inflation in Latin America is still a big risk, as is the growth in the credit book. So while the stock might look tantalizing, it's not an automatic buy; investors need to get comfortable with risks in its fintech segment as well as the general Latin American macroeconomic picture before diving in.