MELI - MercadoLibre: The Bullish Thesis Is Unchanged - Don't Fear Argentina

2023-08-16 13:00:03 ET

Summary

• I urged investors to capitalize on MercadoLibre's stock selloff in July. MELI has significantly outperformed the S&P 500 since then.
• The company's Q2 report showed strong growth in e-commerce and fintech in Brazil and Mexico, despite near-term headwinds in Argentina.
• MELI holders weren't unduly concerned with Argentina's political instability, as they remain unfazed by such regular occurrences.
• Focusing on MercadoLibre's potentially robust operating leverage gains is critical while taking advantage of any near-term pullback.
• I make the case for why MELI remains one of my top-rated "A+" growth stocks. Comment and let me know whether my confidence is rightly conceived.

I urged MercadoLibre, Inc. ( MELI ) investors to return in mid-July as it was hammered due to undue fears about "a new cross-border tax." Bank of America or BofA ( BAC ) even downgraded MELI then, seeing that the move could harm MercadoLibre's competitiveness across the LatAm region.

However, since then, MELI's significant outperformance against the S&P 500 ( SPY ) has debunked sellers' fears and BofA's untimely downgrade. It allowed investors to add more exposure, as dip buyers held the $1,060 level robustly.

MercadoLibre's recent second-quarter or FQ2 earnings release demonstrated why dip buyers' confidence is justified, as it posted a remarkable report. However, if you waited until the release of MELI's FQ2 scorecard before adding, your risk/reward profile is no longer as enticing.

Accordingly, MELI topped out in early August at the $1,390 level, corresponding to its late May highs, before MELI tumbled toward its mid-July lows. Investors must remember that the market is forward-looking. In other words, we need to anticipate MercadoLibre's performance well before heading into its earnings release to determine whether the buy levels are reasonable.

MercadoLibre witnessed strong growth in Brazil and Mexico, with overall e-commerce gross merchandise value or GMV (+22.9% YoY) and fintech's total payments volume or TPV (+39.3%) posting solid gains. These are as-reported metrics, having taken into account forex effects.

In addition, the company highlighted that it has continued to gain share in Brazil, fending off the challenges of its cross-border peers. ex-CFO Pedro Arnt stressed that the " competition in Latin America's e-commerce market is intense." Despite "featuring prominent players from the US and Asia investing heavily in the region," Arnt reminded investors that "the company is gaining market share in Mexico and Brazil." As such, I have confidence in MercadoLibre's defensible market leadership in LatAm, built on its end-to-end e-commerce and fintech business.

With that in mind, losing Arnt as MELI's CFO isn't timely, given his significant experience and insights about MercadoLibre's fast-growing fintech segment. According to Bloomberg, Arnt recently joined Uruguayan payments startup dLocal as co-CEO, which led to a surge in its stock price. While Arnt is a highly-regarded executive, I believe it underscores the significant opportunity in the payments space in LatAm, corroborating that MELI's push into fintech was rightly conceived.

The recent political upheaval in Argentina hasn't spooked MELI holders into giving up their shares. MercadoLibre highlighted in its Q2 shareholder letter that Argentina's near-term demand/supply dynamics were affected. However, the overall impact was mitigated, as "the Commerce business experienced a 1% year-on-year growth in items sold due to the challenging conditions in Argentina."

Moreover, the fintech business did well in Q2 despite the challenging macroeconomic conditions. The company stressed seeing "increasing demand for financial solutions that help consumers manage their money in an inflationary environment." Therefore, MercadoLibre has benefited from the fintech tailwinds while mitigating the near-term headwinds in commerce. Given how well MELI's buying sentiment held up recently, I assessed investors remain confident about management's execution through Argentina's upcoming political and economic transition.

MELI's buying sentiment remains robust despite the recent pullback as it faced resistance at the $1,390 zone. However, I don't anticipate another selloff toward its July lows.

MELI is priced at a premium against its peers, with Seeking Alpha's Quant assigning a "D-" valuation. However, investors should assess its valuation considering its top-class "A+" growth grade. With analysts' estimates pointing to an adjusted EBITDA CAGR of 36.4% from FY22-25, MELI is still reasonably priced.

While MELI's price action suggests a near-term pullback is imminent, I'm constructive on dip-buying support underpinning the continued recovery of MELI toward its all-time highs.

Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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