Latin American e-commerce and fintech giant MercadoLibre MELI has seen its stock decline 11.6% following its third-quarter 2024 earnings release, despite reporting robust growth across its business segments. In the third quarter, the company reported earnings of $7.83 per share, which missed the Zacks Consensus Estimate by 30.52% but increased 9.4% year over year. Revenues rose 35% on a year-over-year basis (103% on a FX-neutral basis) to $5.3 billion. The top line surpassed the Zacks Consensus Estimate by 1.11%.
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The market's reaction presents an opportunity to evaluate the company's current position and future prospects.
Share Price Movement
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Major Takeaways From MELI’s Q3 Earnings
The company demonstrated strong momentum in the third quarter, with unique buyers reaching almost 61 million, up 21% year over year, marking the second consecutive quarter of accelerated post-pandemic growth. The e-commerce segment showed impressive performance, with FX-neutral GMV growth of 34% in Brazil and 27% in Mexico, while Argentina saw items sold increase 16% year over year.
MercadoLibre's fintech division, Mercado Pago, continues to show promising growth with monthly active users rising 35% year over year to 56 million. The credit card portfolio expanded significantly, growing 172% year over year to $2.3 billion, while the total credit portfolio reached $6 billion, up 77% year over year.
The company's infrastructure expansion has been particularly noteworthy, with the opening of five new fulfillment centers in Brazil and one in Mexico during the third quarter. These investments, while creating short-term margin pressure, are crucial for long-term growth and market penetration in a region where e-commerce penetration lags the United States by almost a decade.
Impact of Rising Investments on MELI
However, the company's aggressive investment strategy has impacted short-term profitability. Income from operations reached $557 million with a margin of 10.5%, showing a significant decline of 9.5 percentage points year over year. This compression was largely due to strategic investments in credit business expansion, logistics infrastructure and customer acquisition.
Looking ahead, MercadoLibre's position as the leading e-commerce platform in Latin America, combined with its growing fintech ecosystem and strategic investments, suggests strong long-term potential. The company's focus on innovation and market expansion, evidenced by initiatives like virtual try-ons for makeup and installation appointments for auto parts, indicates a clear path to capturing the significant growth opportunities in the region.
Investors should closely monitor the company's ability to improve margins while maintaining its growth trajectory, particularly in its credit business and logistics operations. The success of these investments in driving user engagement and market share will be crucial factors in determining the stock's future performance.
The Zacks Consensus Estimate for 2024 is pegged at $20.57 billion, indicating year-over-year growth of 42.13%. The consensus mark for 2024 earnings is pegged at $35.49 per share, suggesting a year-over-year rise of 82.37%. However, earnings estimates have moved south by 5.5% over the past 30 days, indicating caution.
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MELI’s Competitive Landscape and Valuation
Although MercadoLibre has a strong foothold in the online retail market of Latin America, rising competitive pressure from the e-commerce giant Amazon AMZN, which is making strong efforts to expand its presence in LATAM, is concerning. MELI also faces strong competition from the retail behemoth Walmart WMT, which is making good progress in the region, especially in Mexico.
Market uncertainties, high inflation, recessionary fears and weakening macro conditions are headwinds for MercadoLibre. Margins are currently under pressure due to increased investments in free shipping, loyalty programs and improvement in customer services, marketing and chargebacks, as well as higher maintenance, hosting and fraud prevention.
The stock's current price-to-sales (P/S) ratio is significantly higher than the industry average, indicating a stretched valuation. This leaves little room for error and makes the stock particularly vulnerable to any negative developments or earnings misses. MELI stock is trading at a premium with a forward 12-month Price/Sales of 3.86 compared with the Zacks Internet - Commerce industry’s 1.8.
MELI’s P/S F12M Ratio Depicts Stretched Valuation
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Conclusion
For current investors, the recent stock decline should not be a cause for panic. The company's strategic investments in infrastructure, credit services and customer experience are positioning it well for long-term growth in the underpenetrated Latin American market. The introduction of new services like the two-tiered MELI+ loyalty program and enhanced logistics capabilities demonstrates the company's commitment to sustainable growth. However, new investors might want to wait for a better entry point. The current margin compression and ongoing heavy investments could create additional short-term pressure on the stock price. The company's aggressive expansion strategy, while promising for long-term growth, may continue to impact profitability metrics in the near term. MELI stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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