Shares of previously red-hot MercadoLibre (MELI) dropped after the company reported third-quarter earnings that missed analyst earnings expectations. The reported earnings per share (EPS) of $7.83 fell short of the anticipated $9.85. Adjusted EBITDA came in at $714 million, shy of the $928 million consensus estimates, causing the stock to fall as much as 17% intraday. Despite the earnings miss, MercadoLibre still offers plenty of positives from the quarter, making this post-earnings dip potentially appealing for patient investors.
I’m bullish on MercadoLibre due to its robust revenue growth, year-over-year earnings progress (despite missing consensus), and a track record of bouncing back from short-term setbacks. The earnings miss largely reflects investments in fulfillment and the rapidly expanding credit card business, underscoring MercadoLibre’s commitment to long-term growth. Additionally, Wall Street analysts rate the stock as a Strong Buy, projecting over 30% upside from current levels.
What to Make of the Earnings Miss
MercadoLibre did miss earnings, and the stock is selling off accordingly. In fairness, that’s what happens when a stock trading for an elevated multiple (42.8 times forward earnings estimates) misses the lofty estimates that Wall Street is expecting.
However, there’s more to this earnings miss than it seems. The company didn’t report a decline in earnings; it achieved $7.83 per share compared to $7.16 in the prior year’s third quarter, reflecting a steady 9.3% year-over-year growth.
More importantly, a large part of the reason behind the miss is that MercadoLibre is making significant investments in long-term growth. For example, the e-commerce juggernaut opened six new fulfillment centers in key markets Mexico and Brazil during the quarter. While these investments add to current costs, they’re set to drive sustained long-term growth in e-commerce. CEO Marcos Galperín explained that shipping merchandise out of its own fulfillment centers creates faster delivery times and a better user experience, which helps to grow the entire MercadoLibre ecosystem.
The company’s Mercado Pago unit issued 1.5 million new credit cards and expanded its credit portfolio by 77% year-over-year. This growth has put some pressure on short-term profit margins due to increased upfront provisions for losses, but it is set to enhance the profitability of its credit business in the long run.
Although the company missed earnings estimates, this was mainly due to its focus on initiatives aimed at long-term growth and strengthening its position as a major e-commerce and payments platform in Latin America.
Plenty of Highlights From Q3
There were also plenty of positives to take from the earnings call. First and foremost, revenue growth is booming. MercadoLibre achieved 35% year-over-year revenue growth in U.S. dollar terms, even amid significant currency headwinds.
The $91 billion company saw accelerated adoption and robust demand growth in key markets like Brazil and Mexico. Gross merchandise volume (GMV), which measures the total dollar amount of goods sold on the platform, increased by 34% year-over-year in Brazil and 27% year-over-year in Mexico.
Despite its long-standing presence in Argentina, MercadoLibre continues to grow in the region, adding nearly seven million new users this quarter—the highest since the surge in e-commerce during the COVID-19 pandemic.
MELI Has Been Here Before
Let’s turn to the fact that there is a strong precedent for MercadoLibre bouncing back after selling off based on a short-term blip surrounding earnings.
Look no further than when the company reported Q4 2023 earnings — MercadoLibre reported lower-than-expected earnings based on a one-time tax hit in Brazil, and the stock fell by over 10% to an intra-day low of $1,577 on February 22nd.
It took a while for shares to get going again, but by August, the stock was trading for over $2,000 a share as the company shook off the one-time tax hit and impressed with subsequent earnings reports, rewarding shareholders. Before the current earnings selloff, the stock closed at $2,117.30 on November 6. An investor buying the $1,577 low in February would have had a gain of roughly 34% over that time, lending credence to the idea that taking advantage of the current selloff will pay off for patient, long-term investors over the coming months.
Is MELI Stock a Buy?
Turning to Wall Street, MELI earns a Strong Buy consensus rating based on 12 Buys, one Hold, and zero Sell ratings assigned in the past three months. The average MELI stock price target of $2,440.83 implies 30.39% upside potential from current levels.
Looking Ahead
MercadoLibre missed on Q3 earnings, but it did so in part to invest in initiatives that will fuel further long-term growth for the MercadoLibre ecosystem. As Galperín explained, “Every time we have invested in enhancing our customer experience, in the past, we have been rewarded with strong growth and improvements in our market position,” and it’s hard to argue with this logic.
I’m optimistic about MercadoLibre due to its continued investment in long-term growth, which will help it expand and solidify its role as Latin America’s leading e-commerce platform. Additionally, its history of bouncing back from earnings disappointments, impressive revenue growth, and continued progress in lucrative markets like Brazil, Mexico, and Argentina add to my confidence in the stock. While the stock is down significantly following Q3 earnings, the company is on the right track, and this short-term dip looks like an attractive buying opportunity for long-term investors.
