Can MercadoLibre Earnings Overcome Latin American Turmoil?

Image: MercadoLibre.

Investors in online marketplace specialist MercadoLibre (MELI +0.41%) have had to deal with some disappointing performance in their shares lately, as the increasingly questionable prospects for Latin America's immediate economic future has led some shareholders to reconsider their holdings in the regional e-commerce giant. As investors prepare for the company's second-quarter financial report on Wednesday afternoon, MercadoLibre needs to answer questions about how it can continue to grow even if the region has to deal with future economic struggles. Let's take an early look at what you should expect from MercadoLibre and how well it can fare in the long run.

Stats on MercadoLibre

Source: Yahoo! Finance

Can MercadoLibre earnings hold up?
Investors have remained nervous in recent months about MercadoLibre earnings, reducing their second-quarter projections by about 3% and making roughly dime-per-share cuts to their full-year 2015 and 2016 estimates. The stock has fallen back as a result, with a 9% decline just since late April.

Looking at MercadoLibre's earnings from the first quarter of 2015 shows some of the obstacles that the company has had to overcome. The company managed to boost sales by nearly 30% compared to the previous year's first quarter, but net income plunged to just barely break-even levels. The problem there, though, was the latest devaluation of the Venezuelan bolivar, where MercadoLibre does a substantial amount of business. If you take out the impact of that devaluation, adjusted net income growth of 14% was actually fairly strong given some of the headwinds that Latin American economies face on the natural resources front.

Yet the real key to understanding MercadoLibre's long-term prospects is its expanding e-commerce ecosystem, which goes well beyond simple purchases of goods to create an integrated platform of services. MercadoLibre itself has gone beyond simple person-to-person sales to bring big retailers with brand names known across the world onto its selling platform, and while those sales still represent a small portion of overall activity on the site, MercadoLibre could see substantial growth from branded retail offerings in the future. At the same time, the MercadoPagos digital payment platform has seen the same level of success that the company's U.S. counterpart has experienced, as users have taken advantage of the payment system for an increasing proportion of transactions, and it has the potential for further growth beyond MercadoLibre's own transactions. Finally, MercadoEnvios has taken the shipping realm by storm, making it easier for e-commerce participants to receive their purchases quickly and efficiently.

One interesting dynamic for the company, though, involves its relationship with eBay (EBAY +0.07%). On one hand, eBay still holds a sizable stake in MercadoLibre, making the American online auction specialist a major investor in its Latin American counterpart. Yet eBay also has its own Latin American unit as well, and over the past year or so, it has looked to attract an increasing number of customers throughout the Western Hemisphere by setting up Spanish- and Portuguese-language websites. Only lately has eBay started to back up its offerings with greater marketing, but it recognizes the growth opportunity in a region where e-commerce hasn't matured as far as it has in the U.S. and other parts of the developed world.

In the MercadoLibre report, keep an eye out for the latest on the turbulent economies of the region and how the company is responding to changing conditions. As long as middle-class citizens in Latin American countries can handle the economic pressures that their nations face, then MercadoLibre will have the opportunity to keep up its superior execution of its strategic vision for its overall business. That could bode well for MercadoLibre even if Latin American continues to struggle into the future.