MercadoLibre (MELI) provides the largest online commerce and payments ecosystem in Latin America. The company provides users a mechanism for buying, selling, and paying as well as collecting, generating leads, and comparing lists through e-commerce transactions.
It has operations in 18 countries including, Argentina, Brazil, Mexico, Colombia, Chile, Venezuela, and Peru, and was founded in 1999, having its base in Argentina.
Compared to similar e-commerce companies, shares of MercadoLibre have underperformed except for Alibaba (BABA) which has fallen the most in 2021. (The Alibaba Stock Forecast can be found here.)
MELI stock has losses of about 28% in 2021. I am bearish on MercadoLibre, considering its high revenue growth is not sufficient to justify its lofty valuation, especially as its debt level is highly elevated.
MercadoLibre Business News
MercadoLibre has recently announced an acquisition of Redelcom, a Chilean company that operates since 2010 as a payment services provider to strengthen its strategy in payment systems.
The news that can be considered pivotal for the stock, and accountable for its sell-off of about 18% within the past month, was the public offering of 1,000,000 shares of common stock at a public offering price of $1,550 per share.
Raising aggregate proceeds of $1.55 billion for general corporate purposes without more specific explanations raises concerns for a couple of reasons.
It is hard to understand why MercadoLibre decided to raise cash now as it reported in Q3 2021 cash and cash equivalents of $987 million. Its current ratio of 1.23 for this quarter is above the 1.0 ratio that is considered neutral.
The most reasonable explanation is that MercadoLibre wants either to fund any strategic acquisitions that it will soon announce, or it had decided to reduce its debt level, which is a major risk.
Q3 Results
The numbers reported in Q3 2021 reflectied very strong sales and total payment volume growth. MercadoLibre reported net revenues of $1.9 billion, up 72.9% year-over-year on an FX neutral basis, and $20.9 billion Total Payment Volume, up 59.0% year-over-year on an FX neutral basis.
The $7.3 billion Gross Merchandise Volume was up 29.7% year-over-year on an FX neutral basis, and diluted EPS rose to $1.92 — a 585% increase year-over-year compared to diluted EPS of $0.28 in Q3 2020.
Not all key financial metrics were positive though. First, the company reported foreign currency losses of $25.2 million because of a general deterioration in FX currencies in three key geographies. Total operating expenses were $646.2 million, representing an increase of 62.7% year-over-year.
There are two main risks that investors should be skeptical of now. Both are fundamental ones.
High Debt, Lofty Valuation
Simply Wall Street data shows that MercadoLibre’s net debt to equity ratio (1141.8%) is considered high. MELI’s debt at present is not very well covered by operating cash flows (19.3%).
MELI stock is relatively overvalued based on its P/E ratio (777.3x), compared to the U.S. Online Retail industry average (20.8x). Its PEG Ratio (15.4x) is also not supportive of a value stock, whereas its P/B Ratio (496.5x) compared to the U.S. Online Retail industry average (3.4x) signals again a relatively overvalued stock.
Other risks to mention include the unstable economic and political climate in Latin America.
Wall Street’s Take
Turning to Wall Street, MercadoLibre has a Strong Buy consensus rating based on seven Buys assigned in the past three months. The average MercadoLibre price target of $2,142.86 represents 81.9% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
