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Bear of the Day: MercadoLibre (MELI)

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It is important that growing companies work to improve margins and lock in consistent profitability in a timely manner. When that growth hits a snag, it can cause volatility in share prices. Unfortunately, that’s evident 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, it is currently being battered by rising costs, and that introduces a certain level of uncertainty that investors may want to avoid for the time being.

MELI is facing margin pressure from increased warehousing expenses, a transition to the public cloud, free shipping subsidies, and discounts on certain POS devices. There is also a rising tide of competition that is threatening to take a chunk out of MELI’s dominant position in the region.

Notably, MELI faces competition from the likes of Amazon (AMZN - Free Report) , Rakuten, and Cnova on the e-commerce side. MELI might have a head start in most of its markets, but these competitors certainly know how to pack a punch. MercadoLibre could also lose market share to brick-and-mortar stores that are still developing their own digital platforms.

These headwinds appear to be reflecting themselves in MELI’s earnings estimate trends. MELI is expected to release its most recent earnings report in a few weeks. For this period, analysts are projecting a quarterly loss of 15 cents per share. That’s significantly wider than the eight-cent loss seen in the consensus just 90 days ago.

This loss would mark a decline of 175% from the year-ago quarter. It would also put the company on pace for a full-year loss of $0.98 per share, down around 138% on a year-over-year basis.

Estimates are also down for fiscal 2019. Analysts now expect earnings of $0.52 per share on the year. Just 90 days ago, that consensus was as high as $0.74 per share. Moreover, while a 52-cent profit is obviously a major improvement from 2018’s loss, it is quite a ways below the $2.53 per share earned in 2017. Earnings are headed in the wrong direction from what you’d like to see out of a growth company.

The Zacks Rank is founded on a belief that share prices and earnings estimate revisions are inherently related. The aforementioned sluggishness in MELI’s earnings estimates has earned the stock a Zacks Rank #5 (Strong Sell) rating.

It’s also worth noting that MELI sports an “F” grade in the Value category of our Style Scores system. It goes without saying that a company on the verge of a significant EPS loss is trading with a stretched earnings valuation, but other key metrics are troubling as well. For instance, one might look to the P/S ratio in this type of situation. But MELI trades with a P/S of 11.4, which is marks a sharp premium to its industry’s average of 1.7.

From a purely technical perspective, MELI looks to be in a better place. The stock has rallied from its Christmas Eve low and now sits above its 50-day and 200-day moving averages. The 50-day MA crossed above the 200-day shortly after the New Year. That will typically offer some type of support.

However, MELI’s rally seems to be in contrast with the direction of its earnings estimates. When these rebounds are in disagreement with the fundamentals, momentum can evaporate in an instant. The moving averages may provide some support, but that doesn’t mean there’s upside potential left here either.

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