Tuesday, December 12, 2017

A current AIM International Fund Holding: MercadoLibre, Inc. (MELI) by: Jack Gorski "Free Market Fights"

MercadoLibre, Inc. (MELI, $271.38): “Free Market Fights”

By: Jack Gorski, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


MercadoLibre, Inc. (NASDAQ:MELI) provides and online commerce platform structured around their online ecommerce marketplace and supported by their delivery and payment platform.

• The firm focuses their business in Latin American countries as they believe this to be an untapped market, separate from the two ecommerce giants, Amazon and Alibaba.

• MELI has experienced many pressures over the past year that have created concerns for shareholders, the most significant of which is Amazon’s announcement to move into South America.

• It was recognized that MELI faced several risks associated to political and currency uncertainty which it has had to overcome in the past 6 months.

• MercadoLibre has hit its price target 6 times since it was admitted into the AIM International Equity Portfolio and is showing signs of reaching a price beyond $300.

Key points: Drivers for MercadoLibre are still showing potential for strong cash flows moving forward. Mobile usage growth has been strong as mobile phone usage and internet access continue to grow, allowing for the number of new mobile registrations to triple over the past few years. Roughly two-thirds of all new users register on mobile devices and as mobile phone penetration continues to increase, MercadoLibre can expect to grow their customer segment even faster than their 2016 YoY growth rate of 98.7%.

The stock is showing to put up a fight against all of its risks, proving its commitment to becoming a strong player in the ecommerce industry. The major concerns pointed out when purchasing this stock was that the Latin American market they operate in has been known to hold significant signs of instability, and that Amazon could potentially move into the same geographic region, disrupt the market and steal their market share. Both of these concerns have materialized over the past year, yet MELI has continued to rebound, showing its sturdiness as a strong ecommerce competitor committed to the region it is established in.

During this past summer of 2017, Brazil, the largest revenue source for MercadoLibre underwent a political scandal that devastated the Brazilian Economy and contributed to spillover effects on other neighboring countries. The stock experienced some difficulty in the following month and half as it struggled to react. After providing some valuable incentives to their customers, MELI was able to offset the economic impact and return grow their share price beyond $290.00. Of course while all of this was going on, Venezuela was also showing signs of complete political collapse. Yet despite this political chaos, MELI held strong and fought back against the risks that could ruin the company.

After receiving the damaging news that Amazon would be expanding its ecommerce reach in Brazil, MercadoLibre stock price fell quickly, scaring many shareholders that MELI would be the next company to fall at the hand of Amazon. Since the news, MercadoLibre’s stock price has rebounded to over $270.00 and management has upgraded their earnings estimates as well, thus showing confidence in the firm’s position and potential. I attribute the strong position to their MercadoPago payment application, which gives them an advantage over their competitors by allowing them to target non-banked individuals. If MELI continues to put up its fight it can expect to keep growing or possible become and acquisition target for the other two ecommerce giants.

What has the stock done lately?

Since Amazon announced that they would be expanding more into Brazil, MELI quickly dropped by ~20%. Despite this news, MELI quickly rebounded, beating earnings by 10% for Q3 and management upgraded their FY guidance. The stock is now up about 23% since its low point post Amazon news. This is good news for the firm after it missed earnings in August by more than 40% and had to downgrade its earnings estimates.

Past Year Performance: MELI has increased 66.30% in value of the past year and still has room to grow. The stock has reached prices beyond $290.00 four times over the past year and despite the several headwinds they have had to face, the stock continues to fight back. A revaluation of the stock led me to adjust my price target to $310.00 a share. This means that the stock is currently trading at a 14.23% discount.

Source: FactSet

My Takeaway

MELI has shown that it can overcome some of the harshest struggles and is continuing to show strong earnings growth. Whether it be political instability and chaos or their largest competitor entering their market, MercadoLibre continues to fight to remain the dominant Latin American Ecommerce platform. After hitting its 52-week high of $297.22 in May, MELI has repeatedly rebounded in price, climbing above $290.00 four times despite all the upsetting news. If the company can continue to hold it positions, it will either successfully defend itself against Amazon, or become an acquisition target for them to successfully move into Latin America. Whichever the outcome, MELI has proven to be a fighter in the industry, overcoming some of the hardest odds and is now on track to be a $300.00 stock.