Please ensure Javascript is enabled for purposes of website accessibility

Why MercadoLibre Stock Crashed Today

By Rich Smith – Jan 7, 2022 at 5:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The "free market" might be at risk in Brazil this year.

What happened

Latin American e-commerce giant MercadoLibre (MELI 1.75%) calls Argentina home but does 60% of its business to the north in Brazil -- and that could become a problem for MercadoLibre stock this year. Warning of storm clouds on the horizon, investment bank Jefferies downgraded MercadoLibre stock this morning.

And by the time the closing bell rang, MercadoLibre was down 6.2%.

Big red arrow going down over a stock chart.

Image source: Getty Images.

So what

That's actually not surprising given the scale of this downgrade. Not only did Jefferies cut its rating on MercadoLibre (from "buy" to "hold"), says, but the banker also cut its price target on MercadoLibre stock from $2,000 to just $1,250.

That's right. In just one day, Jefferies' opinion on the stock went from "it could almost double this year" to "meh, maybe give it a 15% gain?"

As the analyst explained, "[H]eightened macro uncertainty in Brazil" is to blame for the downgrade. With inflation running hot at 11% in Brazil right now, the government has raised interest rates and is now paying 12% on treasury bills in an attempt to cool things down. This could make it more expensive for MercadoLibre to offer debt of its own because MercadoLibre would need to offer rates competitive with the government's offering. At the same time, Jefferies says it saw "sizable moderation in usage growth for [MercadoLibre's] e-commerce app ... in November" and believes this could foreshadow a slowdown in revenue growth for the company.

On top of all that, Newsweek reports that former Brazilian president Luiz Inacio Lula da Silva could retake the presidency this year, ushering in an era of "more state economic intervention" that could slow growth in the private sector.

Now what

Such a slowdown in growth could be a problem for MercadoLibre stock going forward. With its stock valued at 724 times trailing earnings, there's really no "value" argument for this stock. Rather, investors in MercadoLibre have traditionally owned it for its superb record as a growth stock, with revenues compounding at better than 50% annually over the next five years and operating profits growing at nearly 20%, according to data from S&P Global Market Intelligence.

If growth slows this year -- even temporarily -- that's likely to dampen enthusiasm for the stock. In such a situation, Jefferies' decision to step to the sidelines "until macro uncertainty subsides" sounds like the right one.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Jefferies Financial Group Inc. and MercadoLibre. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.