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MercadoLibre Disappoints Despite Impressive Growth

Shopping is a global pastime, and e-commerce giant MercadoLibre (NASDAQ: MELI) has capitalized on the opportunity to provide online-shopping options to customers throughout Latin America. Now that the Latin American economy has shown signs of life after several years of tough conditions, MercadoLibre is tapping into a thriving consumer economy throughout the region and growing its already impressive network of services even further.

Coming into Thursday's second-quarter financial report, MercadoLibre investors had very high expectations for the company. The e-commerce giant wasn't able to deliver on all fronts, and that led to a huge sell-off for the stock, even though long-term prospects remain encouraging. Let's take a closer look at MercadoLibre and what its latest report reveals about what's happening with the business right now.

Image source: MercadoLibre.

MercadoLibre sees plenty of growth -- just not enough

MercadoLibre's second-quarter numbers were mixed in investors' eyes. Sales soared by almost 60%, to $316.5 million, topping the consensus forecast for about $311 million in revenue. Yet adjusted net income was actually down from the year-ago quarter, falling 18%, to $26.9 million, and producing adjusted earnings per share of $0.61. That was far below the $1.03 per share that most of those following the stock had wanted to see from MercadoLibre.

Looking more closely at MercadoLibre's numbers, the company's fundamental metrics still showed extremely strong levels of growth. Items sold hit a new high of 61.5 million units, jumping by more than two-fifths from the year-ago quarter as Mexican volume almost doubled. Gross merchandise volume climbed 36% in dollar terms, to $2.72 billion. Unique buyers were up by almost a quarter, and the number of registered users was up more than a fifth, to 191.2 million, with 9 million new users in just the past three months.

The MercadoPago payment service continued to see success. Payment-transaction counts jumped by almost two-thirds, to 52.1 million, and total payment-volume processed climbed by three-quarters, to $3.15 billion. Penetration gains from MercadoPago were instrumental in driving business for the entire company, with the service seeing 81% of total gross-merchandise volume run through its network, thanks largely to greater adoption in Argentina and Mexico.

MercadoEnvios also showed encouraging growth. The shipping service shipped more than half of all items sold on the platform, and Mexico, in particular, showed huge growth, with shipments nearly quadrupling from year-ago levels.

CFO Pedro Arnt expressed pleasure about how things are going strategically for MercadoLibre. "This first half has marked the initial stages of the deployment of our free shipping and loyalty programs," Arnt said, "meaningfully improving and deepening the already powerful value proposition that we offer our buyers." The CFO thinks that, by making stronger connections with consumers, the company can encourage people to move more of their purchasing activity online, stoking MercadoLibre's results far into the future.

Can MercadoLibre keep growing faster?

MercadoLibre also knows that the MercadoPago service has growth implications beyond the marketplace. In Arnt's words, "There will be a significant demand for new digital products to transform existing financial services in the coming years, and we believe that MercadoPago will be at the forefront of this transformation, generating financial inclusion for millions of people in the regions where we have a presence." As much as similar strides have been made in the U.S. market, the potential for MercadoPago is even larger, because the target audience of those who have inadequate access to ordinary banking services is so much bigger.

Yet what investors focused on were the events that hit MercadoLibre's bottom line. Venezuela went through another major devaluation during the period, hitting the currency by about 75% and leading to the company taking a $25 million loss on foreign-exchange and impairment charges. More importantly, internal expenses jumped, with sales and market spending more than doubling, causing margin figures to fall by about a full 6 percentage points. Product-development expenses were also up significantly.

MercadoLibre investors couldn't get past that disappointment, and the stock plunged 9% in after-hours trading following the announcement. Yet in the long run, spending money to acquire more customers is likely to pay off just as well for MercadoLibre as it has for U.S.-based e-commerce companies that have consistently been willing to report skimpy bottom-line results in favor of investing in business-building strategic moves. Long-term shareholders should think twice before putting too much weight on the single quarter's earnings numbers.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MercadoLibre. The Motley Fool has a disclosure policy.