To The Moon

$MercadoLibre(MELI)$

Mercado Libre is the largest e-commerce platform in Latin America, with a strong focus on Brazil, Mexico, and Argentina. This local specialization helps it maintain a competitive edge against Amazon. However, the company's stock price recently experienced a sharp one-day drop of 16%.

Today, we'll apply a seven-step analysis to understand the reasons behind this decline. Is it a short-term fluctuation or indicative of a long-term issue? Ultimately, we'll address the key question: Is Mercado Libre a good investment opportunity at its current valuation? Is it a better option than Amazon?

Earning Oveview

Before diving into the analysis, let’s examine the recent results that triggered the stock price drop:

• Revenue Growth: Up 37.6% year-over-year.

• Net Income Growth: Increased by 54.7%.

• Cash Levels: Down 15.4% since the start of the year.

• Debt Growth: Up 40.8%.

Despite impressive revenue and income growth, the stock fell due to concerns such as:

• Profit Margins: Declined from 9.5% to 7.5%.

• Earnings Per Share (EPS): Fell short of expectations at $10.

• Investor Sentiment: Worsened due to concerns over investments in credit and logistics.

Historical Performance

If you invested $1,000 in Mercado Libre 10 years ago, you could have purchased about seven shares. Today, those shares would be worth approximately $13,892, including $17 in dividends (discontinued in 2018). This represents a 1,290% gain over a decade.

Insider & Institutional Ownership

• Insider Ownership: Only 0.1%, much lower than the preferred 2%, indicating limited management “skin in the game.”

• Super Investors: Two super investors, Polen Capital Management and Lee Ainslie, hold shares, but recent transactions show net sales of 9,000 shares.

Fundamental & Financial Metrics

• Return on Invested Capital (ROIC): A disappointing 4.8%, below the 10% benchmark.

• Net Profit Margins: At 7.5%, higher than the industry median of 4.9%.

• Share Buybacks: Issued 14.8% more shares over the last decade, diluting investors.

• Debt Management: Long-term debt could be paid off with just over half a year of free cash flow.

• Revenue Growth: A stellar 40.8% compound annual growth rate (CAGR) over the past decade.

• Free Cash Flow Growth: Surged 66.2% in the same period.

• EPS Growth: Increased 222% over 10 years, though hampered by share dilution.

Valuation Analysis

Mercado Libre’s current price-to-earnings (P/E) ratio stands at 67.8, significantly higher than the S&P 500 average of 30.5. To estimate intrinsic value, we used discounted cash flow (DCF) analysis with three growth scenarios:

• Low Scenario: Intrinsic value = $1,266 (with a 30% margin of safety).

• Medium Scenario: $1,575 (30% margin).

• High Scenario: $2,294 (30% margin).

At its current price of ~$1,996, Mercado Libre is near its fair value, particularly under medium and high-growth projections.

Competitive Comparison

When compared to Amazon, Alibaba, and Pinduoduo:

• Valuation: Cheaper than Amazon but pricier than Alibaba and Pinduoduo.

• Growth: Ranked second in growth among peers, behind Pinduoduo.

Conclusion

Mercado Libre demonstrates exceptional growth and appears close to fair value. However, share dilution and insider ownership are notable concerns. While the company’s growth potential is strong, further analysis of competitors like Amazon and Alibaba is necessary to assess relative investment appeal.