The success of growth-minded investing over the past few years has made many people quick to overlook volatility and risk in favor of potential. This is all well and good, but there remains a number of red flags which should compel investors to stay away from even the most hopeful companies during periods of uncertainty. I think that’s exactly what we have in
MercadoLibre ( MELI - Free Report) right now.
MercadoLibre is an e-commerce company. It is the largest online shopping platform in Latin America and is based in Argentina. The website attracts hundreds of millions of visitors and serves as the market leading e-commerce option in countries such as Argentina, Brazil, Chile, Mexico, and more.
Founded just 19 years ago, MercadoLibre is a young company that should continue to develop as access to the internet, delivery availability, and purchasing power improves in its key markets. However, in the short-term, increased costs are putting a massive dent in the company’s profits, and investors are displaying caution.
Notably, MercadoLibre is struggling in Brazil, its biggest market, due to an uptick in shipping costs. The e-commerce giant has also been hurt by other mounting expenses, including interest accrual on convertible bonds and higher income taxes.
Margins are also under pressure due to increased investments in free shipping and loyalty programs. While we take things like Amazon’s (
AMZN - Free Report) Prime program for granted now, free shipping and loyalty subscriptions are still in the early stages for MercadoLibre, and those things take time to get off the ground.
But perhaps most detrimental to the company’s financial results is its high foreign exchange risk. MercadoLibre operates in almost 20 counties with different currencies and must convert money earned into dollars, per SEC rules.
The U.S. dollar has been getting much stronger against MercadoLibre’s key currencies, and that has not been a good thing for the online retailer’s profits.
Here’s a look at what these types of things are doing to the company’s earnings outlook:
The thing to note here is that MercadoLibre is seeing downward revisions to its estimates and universal agreement to the downside among revising analysts. This means that analysts are generally in agreement, and they think MercadoLibre’s outlook is worsening. Heck, the company was expected to be profitable this fiscal year as recently 60 days ago, and now analysts are expecting a significant loss.
The Zacks Rank is based on earnings estimates and earnings estimate revisions, so the negative trend described above explains the stock’s Zacks Rank #5 (Strong Sell).
Moreover, the stock has an “F” grade in the Value category of our Style Scores system. Profits are expected within the next year, so we can see a P/E when looking at the forward 12-month view, but at 499x that figure, MELI’s price looks astronomical. Plus, MercadoLibre’s earnings multiple has been as low as 52x in the past year, so we know the price tag has only gone up.
Looking ahead, estimates have MercadoLibre’s earnings for next year improving by over 350% from this year’s expected losses. That type of short-term earnings growth is rare on Wall Street, and the aforementioned growth-minded investors might be willing to jump on that no questions asked.
But the headwinds above are asking those questions for us, and it just doesn’t seem right to justify the risk right now, especially considering how weak emerging markets have been as of late. The Zacks Rank #2 (Buy) e-commerce king in Amazon seems a lot safer.
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