Purchase MercadoLibre Shares During This Post-Earnings Slump. Unnoticed Factors the Market Overlooks.
Purchase MercadoLibre Shares During This Post-Earnings Slump. Unnoticed Factors the Market Overlooks.
It's hard to deny that investors had some disappointed reactions to MercadoLibre's (MELI 3.26%) third-quarter results, which were announced last week. Shares dropped by over 16% on Thursday alone, and they're still lower than their pre-earnings peak.
But if investors can look past the post-earnings hype, they might see this as a great opportunity to buy low. The market seems to be overlooking an important detail about MercadoLibre's recent and future results.
The cost of growth eats into profits
MercadoLibre fell short of its estimated earnings by a significant margin, reporting a per-share profit of $7.83 compared to a predicted $10. Although sales increased by 37% compared to the previous year and per-share income even went up a bit, it wasn't enough to satisfy investors. The reason? Escalating expenses, which led to a notable decrease in operating income.
However, there's more to the story.
If you're not already familiar with the company, MercadoLibre is an e-commerce platform that serves the South American market. It's often referred to as the "Amazon of Latin America," although that label doesn't quite capture its full potential. It's similar to eBay, Shopify, and PayPal, as it enables individuals to operate their own online stores and process online payments. In fact, MercadoLibre processed $50.7 billion worth of payments alone during the third quarter, which was a 34% increase compared to the previous year.
The problem? Expenditures. They're getting out of hand. As the chart below shows, spending on research and development, marketing, administration, and other expenses increased during the third quarter. Moreover, the company's costs of net revenue and financial expenses also grew faster than its revenue. Worst of all, MercadoLibre's allowance for credit losses nearly doubled in an effort to expand its credit card business. All in all, operating income fell by 29% during the three-month period that ended in September.
However, this was always part of the plan. And the plan is already starting to pay off. It just hasn't become apparent yet.
MercadoLibre is investing in growth
In essence, MercadoLibre is seizing the opportunity before it.
In many ways, South and Latin America are at a similar stage of development as North America was twenty years ago. For example, smartphone adoption in these regions has grown rapidly in recent years. While 90% of adults in the United States now own smartphones, market research firm GSMA reports that Latin America's smartphone penetration rate was only 69% in 2021 and is projected to reach 74% by 2025.
One major difference between the regions? Latin America is often referred to as a "mobile first" market, meaning that the majority of internet access comes from smartphones rather than desktop computers.
Regardless of how people are connecting to the internet, they're connecting. And what they're doing once they're online isn't a surprise.
Just as in the U.S., online shopping and online banking are skyrocketing in Latin America. Analyst firm Americas Markets Intelligence predicts that the region's e-commerce industry will grow by 24% this year and 21% the next two years. Online banking is also following suit, with market research firm Technavio predicting that Latin America's banking-as-a-service market will grow at a 20% annual rate from now until 2028.
But tapping into this opportunity requires resources, which investors may have forgotten. As MercadoLibre's CFO Martin de los Santos told Reuters, "Perhaps what happened is that the market underestimated the amount of investments we are making in credit cards."
Take another look at the snapshot of the income statement from the third quarter above. MercadoLibre is clearly investing more in growth. It's been doing so all year, even if the third quarter saw a significant increase in outlays. But these increased investments are paying off. Although they haven't yet boosted net profits, they are increasing revenue. Once more consumers and corporate clients are on board, the earnings will come. That's what analysts are predicting, anyway. They expect MercadoLibre's per-share profit to more than triple its 2021 total by 2026.
There are plenty of reasons to be optimistic, including the stock's price
Of course, there are no guarantees. The Latin American online banking and payment market could turn out to be more competitive than expected, with rivals like Nu gaining ground. More competition would mean more spending is required.
But if we look at the bigger picture, there's enough growth to go around. And as the region's online payment and e-commerce industries mature, MercadoLibre will actually be able to spend less on marketing and product development. Last quarter's large increase in loan-loss provisions is also likely an outlier, stemming from the company's aggressive efforts to expand its credit card business.
In other words, MercadoLibre's recent results aren't indicative of its likely future. They're an exception rather than the rule. Last week's drop in share price is an opportunity to buy low.
Here's a twist: Industry experts presently predict a price tag of $2,381.29 for this stock, which is over 30% higher than its current value (as of now). Most analysts view MercadoLibre as a solid investment at the moment, disregarding the underwhelming earnings from the last quarter and the subsequent slump in MELI's share price. It appears they've spotted something that the typical investor seems to have missed momentarily.
Investors might find this dip in MercadoLibre's share price an excellent opportunity for investing, considering the company's plans for growth in the rapidly expanding Latin American e-commerce and online banking markets. With many analysts predicting a significant increase in the stock's price in the future, the current lower cost could be an advantageous entry point.
Recognizing that MercadoLibre is allocating substantial resources to fuel its growth, investors should consider the company's long-term potential rather than focusing solely on the recent financial results that led to a decrease in operating income.