MercadoLibre’s Stock Drops Despite Solid Q3 Growth
Latin American e-commerce and fintech leader MercadoLibre (MELI) experienced a significant stock drop of 11.6% after releasing its third-quarter 2024 earnings. The company reported earnings of $7.83 per share, which fell short of the Zacks Consensus Estimate by 30.52%, although this figure marked a year-over-year increase of 9.4%. Additionally, revenues increased by 35% year over year (103% on a FX-neutral basis) to $5.3 billion, surpassing the Zacks Consensus Estimate by 1.11%.
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The market’s response offers a chance to analyze the company’s current standing and future opportunities.
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Key Highlights from MELI’s Q3 Earnings
In Q3, MercadoLibre showed remarkable momentum as unique buyers reached nearly 61 million, a 21% year-over-year rise, marking two consecutive quarters of growth post-pandemic. The e-commerce sector excelled with FX-neutral GMV growth of 34% in Brazil and 27% in Mexico, while Argentina saw a 16% year-over-year increase in goods sold.
On the fintech side, Mercado Pago continued to flourish, evidenced by a 35% increase in monthly active users, totaling 56 million. The credit card portfolio saw substantial growth of 172% year over year, hitting $2.3 billion. Overall, the total credit portfolio grew by 77% year over year, reaching $6 billion.
Furthermore, the company’s expansion efforts included the opening of five new fulfillment centers in Brazil and one in Mexico during the quarter. While these developments have temporarily pressured margins, they are essential for long-term advancement in a market where e-commerce is still catching up to the U.S., lagging by about a decade.
The Cost of Increased Investments on MELI’s Earnings
Despite promising growth, the company’s aggressive investment strategy has negatively affected short-term profits. Operating income stood at $557 million, with a margin of 10.5%, which reflects a significant decline of 9.5 percentage points from the previous year. This drop is primarily attributed to investments in expanding the credit business, enhancing logistics, and acquiring new customers.
Looking to the future, MercadoLibre’s dominance as the leading e-commerce platform in Latin America, coupled with its expanding fintech services and strategic investments, indicates strong potential for growth. Innovative initiatives, such as virtual try-ons for makeup and scheduling installation appointments for auto parts, highlight the company’s commitment to tapping into significant market opportunities.
Investors should keep an eye on the company’s ability to improve profit margins while sustaining growth, particularly in its credit operations and logistics. The success of these investments in boosting user engagement and market share will be critical for the stock’s performance.
The Zacks Consensus Estimate for 2024 anticipates revenue of $20.57 billion, suggesting a year-over-year growth rate of 42.13%. Meanwhile, the earnings estimate for 2024 is set at $35.49 per share, reflecting an expected rise of 82.37%. However, forecasts have been adjusted downward by 5.5% over the past month, signaling potential caution among analysts.
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MELI’s Competitive Landscape and Valuation Challenges
Even though MercadoLibre has a strong position in Latin America’s online retail market, it faces rising competition from e-commerce giants like Amazon (AMZN), which is actively trying to establish a foothold in the region. The company also contends with competition from retail powerhouse Walmart (WMT), which has been making great strides within Mexico.
The market currently presents challenges such as high inflation, recession fears, and weakening economic conditions, all of which impact MercadoLibre. Margins are strained due to increased investments in free shipping, loyalty programs, and enhanced customer services, in addition to rising costs related to maintenance, hosting, and fraud prevention.
MELI currently trades at a price-to-sales (P/S) ratio that exceeds the industry average, indicating a potentially stretched valuation. This situation could leave little room for error and make the stock particularly vulnerable to adverse developments or disappointing earnings. Currently, MELI shares have a forward 12-month Price/Sales ratio of 3.86, compared to the Zacks Internet – Commerce industry average of 1.8.
MELI’s P/S Ratio Reveals Valuation Pressures
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Conclusion
For current investors, the recent decline in stock price should not trigger panic. The strategic investments in infrastructure, credit services, and customer experience position MercadoLibre for long-term growth in a market that remains largely untapped. The rollout of new services, such as the two-tiered MELI+ loyalty program, alongside improved logistics, underscores the company’s commitment to sustainable advancement. However, potential new investors may wish to hold off until a more favorable entry point emerges. The ongoing margin compression and significant investments might apply further short-term pressure on the stock price. While the aggressive expansion strategy showcases promise for future growth, it could still affect short-term profitability metrics. Currently, MELI holds a Zacks Rank #3 (Hold).
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