Buy MercadoLibre Stock On This Post-Earnings Dip. Here's What the Market's Missing. – The Motley Fool

There's no denying that investors weren't too thrilled with the third-quarter results mercadolibre (Meri 4.76%) Posted last week. That number sent the stock down more than 16% on Thursday alone, and it's still well below its pre-earnings peak at press time.

But for investors who can ignore all the post-earnings noise, this pullback is a buying opportunity. The market is ignoring important details about recent (and near-term) performance.

Large expenditures put pressure on profits

MercadoLibre missed earnings estimates by a country mile, reporting earnings of $7.83 per share compared to consensus estimates of $10. Sales grew at a solid 37% year over year, and earnings per share increased slightly, but it wasn't enough. The surge in spending, which led to a sharp decline in operating profits, has only spooked investors, and rightly so.

However, there is more to the story.

Maybe you're reading this and you're not familiar with it, but MercadoLibre is the name of an e-commerce company serving the South American market. It is often said that Amazon In fact, it's far from a complete description, but it's about Latin America. It's also similar eBay, Shopifyand paypal This allows customers to run their own online stores and process online payments. In fact, MercadoLibre processed $50.7 billion worth of payments in the third quarter alone, an increase of 34% year over year.

problem? Expenses. There are too many. As the chart below shows, spending on everything from research and development to marketing and administration increased. The company's “cost of net revenues and finance charges” also increased far more than sales. Perhaps most worryingly, MercadoLibre's collective efforts to expand its credit card business have nearly doubled its provisions for credit losses. Add it all up and operating profit actually fell by 29% in the three months to September.

The problem is, this was always the plan. And the plan is paying off. It's not yet clear whether it's paying off.

MercadoLibre invests in growth

Simply put, MercadoLibre is capitalizing on the growth opportunity in front of it.

In many ways (though not all), where South and Latin America is today is where North America was 20 years ago. For example, the popularity of smartphones has exploded in the past few years. Pew Research reports that 90% of adults living in the United States now own a smartphone, but market research firm GSMA estimates that smartphone penetration in Latin America will be just 69% in 2021 and expected to grow by 2025. The company stated that it is still in the middle of a conservative forecast of 74%.

One key difference between the regions is that Latin America is a “mobile-first” market. This means that for most people, their primary means of connecting to the world via the Internet is their mobile phone, rather than their home computer.

No matter how you get online, you're still going online. It's not surprising what you do once you're online.

As in the United States, Latin America is experiencing an explosion in online shopping and online banking. Americas Markets Intelligence believes the region's e-commerce industry will grow by 24% this year, 21% next year, and another 21% the year after. Online banking is following suit, with Technavio saying Latin America's banking-as-a-service market is expected to grow at an annual rate of 20% between now and the end of 2028.

But capital is needed to take advantage of this opportunity, which investors seem to have forgotten. “What probably happened is that the market underestimated the amount invested in credit cards,” Martín de los Santos, MercadoLibre's chief financial officer, told Reuters. he said.

Now look again at the snapshot of last quarter's income statement above. MercadoLibre is clearly spending more on growth. In fact, this trend has continued throughout the year, even as spending increases in the third quarter accelerated previous spending growth. But this increased spending is paying off. Net income hasn't increased yet, but revenue has. The more consumers and business customers join, the more revenue they can make. In any case, this is the word from the analyst community. The company expects its earnings per share to more than triple from last year by 2026.

Data source: StockAnalysis.com. Graph by author.

There are still many things I don't like, including the stock price.

Of course, there are no guarantees. The Latin American online banking and payments market could prove to be surprisingly competitive, with rivals such as: Nu It's coming strong. More competition means more spending.

But look at the bigger picture. Expect plenty of growth. Additionally, as the region's online payments and e-commerce business matures and people become more familiar with both, MercadoLibre will actually end up spending relatively less on marketing and product development. The large increase in loan loss reserves last quarter is also an anomaly rather than an outlier due to the company's very aggressive efforts to expand its credit card business.

In other words, this company's recent performance is no indication of its future potential. These are exceptions that drive the growth of larger trends. Last week's decline is a buying opportunity.

This may help: Analysts' current consensus price target of $2,381.29 is more than 30% above the stock's current price (as of this writing). A majority of this crowd also believes MercadoLibre is a strong buy at the moment, ignoring last quarter's disappointing earnings and subsequent decline in MELI stock. They clearly see things that the average investor seems to have lost sight of for the time being.