Summary
- MELI has pulled back more than 20% from its recent highs at its January lows.
- The riot in Brazil by ex-President Jair Bolsonaro supporters had threatened to instill fear in Brazilian equities. However, we gleaned that the market appears to be unfazed.
- The critical issue remains whether new President Lula's policies could cause another surge in inflation rates that could impact MercadoLibre's Fintech segment.
- However, MELI buyers have returned consistently since its June lows to buy significant dips. Therefore, the current dip looks interesting if you missed the previous ones.
MercadoLibre, Inc. ( MELI ) stock has struggled for traction since its remarkable Q3 earnings release in early November. However, we also urged investors to be cautious, as the momentum spike likely led overzealous investors to join the rally.
Accordingly, MELI pulled back more than 20% from its November highs toward its January lows. With the significant retracement, we believe MELI's reward/risk has improved markedly. Furthermore, inflationary headwinds that impacted the Brazilian economy have subsided, even though the recent riot in Brazil by ex-President Jair Bolsonaro supporters likely cast further doubts on Brazil's political stability.
Institutional investors and hedge funds remain cautious over the new President Luiz Inácio da Silva or Lula's administration. They are concerned whether policies could stoke another run of unwelcome inflation after Brazil's Central Bank performed incredibly well in bringing its record-high inflation under control.
As seen above, Brazil's inflation rate has collapsed from a 5Y high of more than 12% in April 2022 down to 5.9% in November, as its Central Bank lifted its interest rates aggressively.
Therefore, the inflationary headwinds that also impacted MELI's lending business could be alleviated if Lula's policies do not cause consternation of surging inflation rates moving ahead.
However, investor positioning is still circumspect over Lula's moves, seeing the need to increase the risk premium in Brazilian stocks. Generali Insurance articulated:
By themselves, the weekend events are not a game changer. But it comes at a time when questions on Brazil are a bit higher than before. There is a lot of risk premium related to the new administration. [The] weekend events did not really help the risk premium to decline. - Bloomberg
Given MercadoLibre's significant Brazil revenue exposure of more than 53% in FQ3, we urge investors to continue monitoring Lula's policies that could either lift/moderate Brazil's inflation rates.
Notwithstanding, LatAm fund managers are sitting on "cash levels close to record highs." Therefore, opportunistic and high-conviction investors could see the recent pullback as a constructive opportunity to pull the buy trigger.
MeracdoLibre Commerce change % and Fintech revenue change % (Company filings)
With MercadoLibre's e-commerce revenue growth slowing dramatically, the company needs its Fintech segment to bolster its forward growth projections as it laps highly challenging comps.
Given MELI's growth premium, investors will not take it lightly if the company is unable to lift its growth projections.
MercadoLibre Commerce take rate % and Fintech take rate % (Company filings)
Furthermore, with its Fintech take rate significantly lower than its e-commerce business, the company could find it more arduous to gain operating leverage through its payments ecosystem.
Despite that, analysts have penciled in improving adjusted EBIT profitability estimates, seeing LatAm's most prominent e-commerce operator continuing to drive efficiency gains as it scales.
Accordingly, MercadoLibre is expected to post an adjusted EBIT margin of 7.3% for FY22 at its upcoming Q4'22 release before improving to 8.5% for FY23.
Some investors could still be concerned over whether the recent political events in Brazil could spill over into the equity markets. However, we believe the risks appear to be controlled, in line with the market's consensus .
Furthermore, MELI and the iShares MSCI Brazil Capped ETF ( EWZ ) did not suffer from steep capitulation moves following the riot. Hence, we believe the market has likely already priced in significant headwinds on Lula's Presidency, as the EWZ remains 20% below its early November highs.
Furthermore, we gleaned that significant dips in MELI's price action have been well-supported by buyers since June.
It also appears to be recovering control of its 200-week moving average or 200-week MA (purple line), potentially regaining a critical defense line lost since collapsing to its June lows.
MELI last traded at an NTM EBITDA multiple of 32.6x, well below its 10Y average of 93.3x. However, with the company's growth expected to slow further through 2024, we don't expect a significant re-rating to its historical averages. Coupled with its premium over its peers' median of 8.6x NTM EBITDA, the company has much to prove to justify its valuation, despite the battering.
Investors considering adding MELI should consider an appropriate risk exposure, and buying on significant dips, avoiding the momentum spikes.
Rating: Buy (Revise from Hold).
For further details see:
MercadoLibre: Fortune Favors The Brave