I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Mercadolibre (Nasdaq: MELI). Is this South American online marketplace operator the real thing? Let's get right to the numbers.

Foolish facts



CAPS stars (5 max) ****
Total ratings 936
Percent bulls 92.8%
Percent bears 7.2%
Bullish pitches 133 out of 150
Highest rated peers On2 Technologies, Spark Networks, PHOTOCHANNEL NETWORKS

Data current as of Nov. 26.

For the most part, Fools like Mercadolibre. They appreciate not only its growth but also its competitive position as Latin America's answer to eBay (Nasdaq: EBAY) -- a position that has helped the stock return more than 350% since joining the Rule Breakers scorecard in March of 2009.

"Lacks competitors in Spanish speaking market in Mexico, Argentina, and the rest of Latin America. Increasing revenues being only a couple years into cycle. Look for continued growth [as the] Pago platform is very successful. American firms cannot duplicate local knowledge of how business runs with Latino consumers," wrote Foolish investor HighOnChina earlier this month.

Local knowledge has always been key to the thesis for Mercadolibre, and it's paid off via the virtual monopoly HighOnChina refers to. But you wouldn't know that from the valuation. With a 1.3 PEG ratio, Mercadolibre trades for a decent but by no means outrageous premium to the long-term growth analysts expect.

The elements of growth


Last 12 Months



Normalized net income growth 67.6% 36.2% 117.5%
Revenue growth 29.3% 26.1% 61.0%
Gross margin 78.8% 79.2% 79.9%
Receivables growth 101.7% 38.7% (81.0%)
Shares outstanding 44.1 million 44.1 million 44.1 million

Source: Capital IQ, a division of Standard & Poor's.

Looking at this table, I can see why Wall Street has been optimistic. But now may be the time for caution. Let's get into the numbers:

  • Both revenue and normalized net income are up over last year but down from 2008. That's not necessarily a bad sign, but it speaks to the unpredictability of the underlying business.
  • Gross margin has declined steadily, not a good sign in that it suggests that whatever pricing power Mercadolibre has could be eroding. eBay has battled a similar problem in recent years.
  • More troubling is that receivables are now growing much faster than revenue, a sharp reversal from 2008. Free cash flow is up marginally over the same period. (From $50.9 million in 2008, to $53.3 million over the trailing 12 months.)
  • The good news? Mercadolibre is self-funded and doesn't need to issue shares.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

Amazon.com (Nasdaq: AMZN) 40.6%
eBay 0.7%
Google (Nasdaq: GOOG) 24.1%
Mercadolibre 86.5%
Microsoft (Nasdaq: MSFT) 9.3%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 26.

Mercadolibre is clearly the big grower in this table; not even Amazon gets close. Still, I find the comparison to eBay worrisome. If gross margins are declining now, what happens when competition gets tougher? Will new entrants disrupt Mercadolibre the way Craigslist has obviously disrupted eBay?

Grade: Unsustainable
I wish I knew for sure, but it seems likely. And yet you could say this same thing about a number of our very best Rule Breakers picks. If I'm loath to bet against Mercadolibre, it's because I'm a member of that team and a student of business history. What looks weak sometimes isn't. Multibaggers are created where such misunderstanding exists.

Now it's your turn to weigh in. Do you like Mercadolibre at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on Mercadolibre? Add it to your watchlist by clicking here.

Google and Microsoft are Motley Fool Inside Value picks. Google and Mercadolibre are Motley Fool Rule Breakers recommendations. Amazon.com and eBay are Motley Fool Stock Advisor selections. Motley Fool Options has recommended subscribers open a bull call spread position in eBay and a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google and Microsoft. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.