Should You Buy the Dip in MercadoLibre?

Source: MercadoLibre

Introduction

MercadoLibre has fallen by 15% over the last six months.

Economic uncertainty in Latin America is generating negativity among investors. Besides, competition from Amazon and eBay could be a considerable risk in the medium term.

On the other hand, the company is firing on all cylinders, and it has abundant opportunities for growth.

The bears may be underestimating MercadoLibre’s competitive strengths.

Is the dip in MercadoLibre a buying opportunity for investors?

Lackluster Performance

Argentina and Venezuela Are Big Markets for MercadoLibre

Source: MercadoLibre

Economic Turmoil in Latin America

Brazil is generating disappointing economic growth lately.

Venezuela and Argentina are experiencing rampant inflation rates and exchange-rate volatility.

Regulations in Venezuela limit MercadoLibre’s ability to freely move its cash across boarders.

Foreign Exchange Rate Volatility in Venezuela

MercadoLibre has recently changed the exchange rate used to report financial results in Venezuela.

The company will record a one-time re-measurement charge of between $47 million and $57 million in the second quarter due to the write-down of all of its Bolivar-denominated assets.

MercadoLibre also expects to recognize a foreign-exchange loss of between $14.5 million and $21.5 million because of this accounting change.

Risk and Opportunity in Latin America

Economic uncertainty in Latin America will clearly be an important risk factor for MercadoLibre in the medium term.

However, opportunities for growth are still exceptional in the region over the years ahead.

A rising middle class and increased Internet penetration bode remarkably well for MercadoLibre over the long term.

E-commerce accounts for only 3% of retail transactions in Latin America, leaving enormous room for further growth.

Source: MercadoLibre

Core Operating Metrics

Source: MercadoLibre

Payment Operating Metrics

Source: MercadoLibre

Sales

Source: MercadoLibre

Net Earnings

Source: MercadoLibre

MercadoLibre vs. Amazon and eBay

Both Amazon and eBay have increased their presence in Latin America lately.

Amazon launched its Kindle store in Brazil in December 2012; the company sells its devices at physical retailers and is offering digital products in the country.

eBay is also promoting its cross-border shipping capabilities in Brazil, especially in electronics.

Amazon and eBay are successful companies with a proven track record of growth and expansionary ambitions.

They also have deeper pockets than MercadoLibre.

Competitive Strengths

MercadoLibre has the first-mover advantage and a widely recognized brand in Latin America.

The e-commerce business is dominated by the network effect: Buyers and sellers attract each other to the platform, and the service becomes more valuable as it gains more users on both sides of transactions. This is a big advantage for MercadoLibre against Amazon and eBay.

Amazon and eBay will probably face considerable regulatory hurdles when it comes to international shipping and payments. MercadoLibre understands the ins and outs of doing business in Latin America.

Even if competition increases over time, growth opportunities should be big enough for MercadoLibre, Amazon, and eBay to succeed in Latin America over the long term.

Foolish Takeaway Economic uncertainty in Latin America can hurt performance in the

medium term. However, over the long term, MercadoLibre can benefit from exceptional growth prospects.

MercadoLibre is generating rock-solid performance in spite of economic headwinds.

The company has enough competitive strength to defend its business from Amazon and eBay. Besides, there should be enough room for the three companies to operate successfully in Latin America over the years ahead.

For investors who can withstand the short-term volatility and focus on the long-term opportunity, buying the dip in MercadoLibre sounds like smart idea.

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