MercadoLibre Stock: Fades Rally Before Reversing (NASDAQ:MELI)

MELI’s high growth investment thesis is in full swing

We previously covered MercadoLibre, Inc. (NASDAQ:MELI) in July 2024, discussing why we reiterated our Buy rating then, attributed to its FQ1’24 earnings call, market share gains in Latam and robust performance metrics.

We’ve also highlighted some metrics that readers should look out for in its August 02, 2024 FQ2’24 earnings call, highlighting the health of its business along with its near-term outlook.

MELI Stock Price YTD

Since then, MELI has generated a robust return of +16.9%, well outperforming the broader market at -2%. Otherwise, by +215.8%/+53.2% from the June 2022 low, respectively.

Much of the tailwinds are attributed to the massive sell-off that occurred after the September 2021 peak, which decimated most of the stock’s gains due to the COVID-19 pandemic.

This is significantly helped by MELI’s seven consecutive quarters of top/bottom beats, one we also saw in Q2’24, with revenues of $5.07 billion (+17% q/q/ +41.6% YoY) and adjusted EPS of $10.48 (+54.5% YoY/ +103% YoY).

Robust performance metrics from MELI

Much of MELI’s top-line growth is attributed to accelerating total trade revenue of $2.97B (+19.2% QoT/ +53.8% YoY), far outpacing the fintech segment at $2.1B (+14.7% QoT/ +28% YoY). ).

With trade services revenue including fees derived from brokerage services/carriage/storage fees and classified fees derived from classified advertising services/ad sales, we believe trade remains its top driver at approximately 91.5% of sales its FQ2’24.

This is because MELI management is already highlighting its advertising penetration reaching 2% of its commercial GMV in FQ2’24 (+0.4pts YoY) – involving $252M in advertising revenue (+51% YoY constant currency) based on GMV of $12.64. B (+83% constant currency YoY).

Even so, with most of the advertising tailwind attributed to “strong performance from cross-border sellers from 1P brands and that product continues to account for the majority of the business,” we believe there remain large opportunities for growth going forward as what management expands. advertising business to complement its e-commerce business.

MELI’s future advertising opportunities

In any case, eMarketer already expects MELI’s advertising revenue to grow from $708.5 million in 2023 to $1.9 billion in 2026, expanding at an accelerated CAGR of +39.4% and potentially , being its top/bottom engine given the typically high-margin nature of the margin. advertising business.

This is in addition to the projected expansion of the market share of media retail ad spend to 53% by 2026, up from 49.4% in 2021, if not more – based on the company’s eighth consecutive quarter , with a (advertising) growth rate of over +50%” on an annual basis.

As a result of the high growth trend and accelerated economic growth as discussed above, it is not surprising that MELI has outperformed its trading peers on a YTD basis apart from Sea Limited (SE).

Readers should also not ignore MELI’s fintech segment, Mercado Pago, with management already reporting an increase in fintech monthly active users (MAU) of 52 million (+6.1% ToT/ +36.8% YoY) in the last quarter.

We believe much of its success is attributed to the strategic launch of the “remunerated account, which pays interest as soon as funds are deposited with immediate liquidity” – one that we have observed similarly to MAS).” rel=”nofollow” > MariBank, a digital bank that is a wholly owned subsidiary of SE.

This strategy has enabled MELI to report triple user growth and more than double USD Assets Under Management (AUM) growth over the past 18 months in Argentina, driving the country’s +285% year-over-year increase in consolidated net income and finance income switched to constant currency.

The same was seen in Brazil, with +46% year-over-year growth in MAUs, +86% in AUM and +59% in sales.

As a result of these promising early results, it is no surprise that MELI has announced its intention to apply for a digital banking license in Mexico in May 2024, allowing the company to take advantage of a high-growth fintech opportunity while improving sales cross to existing trade. users in the country.

Although management does not break down the bottom line performance of its digital banking segment, we can infer from SE Digital Financial Services’ rich EBITDA margins of 31.7% last quarter (+2pts ToT/ -0.3 YoY), which suggests Fintech Business ( likely to be) very profitable to MELI.

Finally, while Mercado Pago’s consolidated net interest margins after losses (NIMAL) moderated to 31.1% (-0.4 points q/q/-5.7 y/y), a some of the difficulty is attributed to the lower spreads on its credit card, one we have also seen with other credit card issuers as delinquency/charge rates normalize.

Part of the risks are also attributed to Argentina’s ongoing devaluation, which triggered MELI’s impacted consolidated net income and finance income growth of +1% YoY in the country compared to +285% YoY at constant currency.

This issue led to a decline in its overall EBIT margins on a comparable basis by approximately 120 basis points from last year, partly attributable to higher provisioning for bad debt as management seeks to grow its origination book credit – explaining NIMAL margins affected, as discussed above.

However, readers should also note that MELI’s 15-90 day NPL has already declined to 8.2% (inline QoQ/ -1.1pts YoY), highlighting the robust quality of the fintech portfolio and improving underwriting capacity.

These developments further underline why MELI has outperformed, thanks to its well-diversified growth prospects across e-commerce, logistics, fintech and advertising offerings.

So MELI Stock is a Buysell or keep?

MELI 5Y share price

For now, MELI has maintained a robust uptrend from the June 2022 low with minimal deviation seen so far as the stock trades close to its 50/100/200 day moving averages.

However, based on adj LTM EPS of $32.37 ending FQ2’24 and average 1Y P/E of 45x, it is clear that the stock is now trading at a significant premium to our fair value estimates of $1.45K.

Does this mean we’re downgrading MELI to a hold now?

Not really.

First, we maintain our belief that MELI remains a compelling growth stock with robust double-digit growth prospects over the next few years. Given that market leaders are rarely cheap, we believe investors should time their purchases only based on market sentiment and dollar cost averaging.

This is because the stock currently trades at a relatively reasonable PEG ratio of 1.42x, based on its non-GAAP FWD P/E of 55.82x (higher than its 1Y average of 45x) and projected EPS adj expansion at a CAGR of +39.3% by FY2026.

Compared to its well-diversified trading peers such as:

• Amazon.com, Inc. (AMZN) at 1x (author’s calculation, based on a similar method to non-GAAP FWD P/E of 36.74x and adjusted EPS growth of +36.6%).
• Shopify (SHOP) at 1.95x (author’s calculation, based on 65.88x and +33.7%)
• SE at 0.53x (author’s calculation, based on 41.40x and +77.6%),

it is undeniable that MELI is trading somewhat attractively here.

Second, there remains excellent upside potential of +38.6% for the reiterated long-term price target of $2.76K from current levels (otherwise updated to $2.82K), based on average P/E 1-year forward of 45x (attributed to swing from 1Y Peak of 62.66x and 1Y low of 40.78x) and FY2026 EPS consensus estimates of $61.52 (otherwise updated to $62.76).

Otherwise, interested investors may want to wait for a moderate pullback to our recommended entry point of $1.65,000 for an improved margin of safety.

This potential correction is really not too aggressive as MELI recently broke out of its bullish pattern as it did in early 2024 with a further correction of its previous support levels of $1.65,000 likely in term short and these levels triggering an extension. +70% upside potential from long-term price target.

Stock market volatility

With the CBOE Volatility Index already above October 2023 levels and the McClellan Volume Summation Index hitting extreme greedy levels of 1,637 (compared to neutral levels of 1,000x), we believe there may indeed be more volatility on the horizon short term.

As a result, while we remain bullish on MELI’s long-term outlook, we believe there could be a near-term market correction as seen in the SPY moderation since late August 2024.

While we reiterate our long-term buy rating, interested investors may want to monitor the stock’s movement for a bit longer before adding on the upcoming pullback to the $1.65,000 support levels for a margin of safety improved.