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.
Summary
• 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.
