MercadoLibre Earnings Blew Away Forecasts, Now What?

MercadoLibre Earnings Call: Latin American eCommerce giant MercadoLibre (NADSAQ:MELI) recently posted its earnings for Q2, showing substantially higher income and revenues than were expected by Wall Street.
The market responded very favorably, giving the stock a substantial boost in the sessions immediately following the earnings report.
The question investors must answer now, though, is where MercadoLibre goes from here?

How Large Was MercadoLibre’s Earnings Surprise?

In Q2, MercadoLibre reported earnings of $2.43 per share. The consensus estimate, by contrast, was just $1.68 per share, giving the company a $0.75 surprise beat.
In addition to this excellent earnings performance, MercadoLibre reported revenue of $2.6 billion against an estimate of $2.51 billion. Revenue grew by 57 percent year-over-year.

Even more encouraging for MercadoLibre investors was the growth of the company’s Fintech business, Mercado Pago. This branch saw growth of 112.5 percent year-over-year, the second year in a row it has grown by triple digits.
Mercado Pago is one of the most attractive aspects of MercadoLibre’s business, as it creates opportunities for higher margins in payment processing and financial services.
MercadoLibre also saw strong growth in gross merchandise volume, which rose 26.2 percent YoY. Cumulatively, these growth numbers show that the business continues to perform well, even though the stock has sold off considerably this year.

Where Does MercadoLibre Go From Here?

At this point, MercadoLibre seems primed to continue growing at a rapid pace. The company has the potential to grow at a rate of 40 percent or more over the next few years. While this is lower than the numbers MercadoLibre has posted recently, it is still an excellent rate of growth for such a large company.
MercadoLibre has ample room to expand by making more inroads in emerging Latin American markets. At the moment, nearly 95 percent of the company’s revenue comes from Mexico, Brazil and Argentina.
MercadoLibre, however, operates in 15 other countries that make up the remaining small percentage of its revenues.
By increasing its presence in these markets, the company should be able to continue growing quickly for some time to come.

The company’s Fintech division also has enormous potential as Latin America continues to develop economically. As of 2020, only 55 percent of Latin Americans had traditional bank accounts.
As Mercado Pago moves from pure payment processing into services like credit and investment, it will have a large addressable market of consumers who have not been served by legacy financial institutions.

MercadoLibre Valuation

On the surface, MercadoLibre appears to have a valuation problem. The stock trades at more than 34 times book value and at a forward P/E of 144.6.
Price-to-sales is more favorable at 6.2, but still somewhat high. Due to its ongoing growth prospects, though, these numbers aren’t as negative as they would initially appear. MercadoLibre certainly isn’t undervalued, but its price more or less accurately takes into account its future growth potential.
Analyst forecasts largely support this view, giving MercadoLibre a median price target of $1,240 over the next 12 months. This would give the stock an upside of 14.6 percent from its current price of $1,082.38.
Assuming the company’s revenue and earnings continue to grow at rapid rates, MercadoLibre stock could begin to move into more comfortable territory from a valuation perspective.

Political Instability A Major Risk Factor

Most of MercadoLibre’s most fundamental risks stem from the countries in which it does business. Latin American countries are prone to both political and economic risks, often making it difficult for companies to succeed reliably in the region.
As a large business that is tied to multiple markets throughout Latin America, MercadoLibre is exposed to several potentially negative macroeconomic factors.
A slowdown of growth could also be sharply negative for the company. Because it trades at such high multiples, MercadoLibre must continue to deliver extremely high growth rates in order to maintain its stock price.
If an unexpected slowdown in revenue growth or a negative quarter for earnings were to occur, investors could see the stock sustain considerable losses. This risk is not unique to MercadoLibre, as it applies to nearly all high-growth companies.
As 2022 has shown, though, adjustments in growth expectations can drive share prices down quite suddenly when they occur.

Is MercadoLibre a Buy?

With regards to macroeconomic risks, MercadoLibre is likely in a good position for continued success. Despite ongoing volatility in Latin America, management has successfully guided the company through years of excellent growth.
At this point, there’s little reason to believe that MercadoLibre’s historically solid execution will falter in the near future.
Another consideration is that MercadoLibre is still down nearly 20 percent for the year, even after its earnings surprise. As such, investors may be looking at a closing window to buy the stock at a discount.
If the company has another quarter or two of better-than-expected earnings growth, MercadoLibre stock could become flat for the year, rewarding investors who bought while prices were depressed.
Between a large addressable market, excellent execution and the potential that Mercado Pago has to boost earnings, MercadoLibre looks like a good bet for growth. Investors may not see staggering gains this year, but the company appears to be on a very solid trajectory.
With that said, investors should recognize that MercadoLibre is still a bit of a risky buy. In order to generate strong returns for investors, the company will need to continue growing at a rapid pace for the next 3-5 years.
While this looks like a strong possibility, it’s important to remember that stocks whose value is based on high growth rates are inherently risky.
Overall, MercadoLibre is likely a good buy for investors looking for strong growth in emerging markets. A certain degree of risk tolerance and willingness to wait for returns is required for MercadoLibre investors, but the returns over the next few years could be well worth it.
Because of the region in which MercadoLibre operates, it could also be a good choice for investors who are turning bearish on Chinese stocks but still looking for international diversification.

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