Latin American e-commerce star MercadoLibre (MELI -0.63%) had a fantastic first quarter of 2022, reporting 67% revenue growth powered by barnburning growth in the company's newish fintech business, where sales more than doubled year over year.
On Friday that news sent MercadoLibre shares shooting as much as 8% higher, but it didn't take long for things to turn south. MercadoLibre stock plummeted on Monday, recovered only a bit on Tuesday, and at noon ET on Wednesday, MercadoLibre was down again -- falling 6.4%.
The question is: Why?
There's no obvious bad news on the wires about MercadoLibre today, after all. Instead, to find out why MercadoLibre stock is in free fall, I'm afraid you need to dig a little deeper -- and be plugged in pretty closely to analyst expectations for this Latin American growth stock.
When MercadoLibre reported its strong financial performance last week -- and then began to sell off just a day later -- I got sufficiently interested in the stock to take a close look at the company's anticipated growth rate, as calculated by analysts polled on S&P Global Market Intelligence, and its free cash flow. MercadoLibre reports much less earnings under generally accepted accounting principles (GAAP) than it produces as real cash profit.
And do you know what I found?
With $400 million in trailing free cash flow, and an expected growth rate of well over 100% annualized over the next five years, MercadoLibre was finally selling for a price-to-free cash flow ratio of just 1 -- cheap enough not just for growth investors, but also for value investors, to buy.
But here's the thing: At some point in the last day or two, one or more analysts must have drastically scaled back their expectations for MercadoLibre, because the consensus growth projection or the stock has now been cut in half. At 59% currently, it's still a fantastic growth rate for MercadoLibre over the next five years. But the size of the cut in forecasts is sufficiently large that MercadoLibre stock is now valued at a price-to-free-cash-flow-growth ratio of about 1.65. That's not insanely overvalued in a crazy market like the one we've lived through over the past two years, but it's no longer obviously cheap, either.
Granted, the fact that expectations can change so quickly -- and so drastically -- suggests investors should take all such predictions with a few grains of salt when valuing MercadoLibre. With the stock down 40% over the last 52 weeks, a lot of risk has definitely been squeezed out of this stock. It's certainly safer to invest in MercadoLibre today than it's been in a long time.
Just be aware: It's not entirely safe yet, and MercadoLibre may still have farther to fall.