Why Is MercadoLibre (MELI) Down 8.1% Since Last Earnings Report?

A month has gone by since the last earnings report for MercadoLibre (NASDAQ:MELI). Shares have lost about 8.1% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is MercadoLibre due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

MercadoLibre Reports Loss in Q4

MercadoLibre reported fourth-quarter 2019 loss of $1.11 per share, missing the Zacks Consensus Estimate of a loss of 69 cents. Moreover, the figure is wider than a loss of 5 cents and 97 cents reported in the year-ago quarter and previous quarter, respectively.

Mounting marketing spending affected the company’s profitability during the reported quarter.

Revenues improved 11.8% sequentially and 57.5% on a year-over-year basis (84.4% on an FX neutral basis) to $674.3 million. Further, the figure surpassed the Zacks Consensus Estimate of $668 million.

The top line was driven by accelerating marketplace and non-marketplace revenues, which grew 55.3% and 60% year over year, respectively. Further, increasing total payments volume (TPV) on the back of robust Mercado Pago and mobile-point-of-sale (MPOS) business remained a major positive. Moreover, solid TPV growth via Mobile wallet across Brazil, Argentina and Mexico remains a major positive.

Additionally, strong performance of Mercado Fondo and Mercado Credito contributed to the results.

Further, the company’s rising gross merchandise volume (GMV), courtesy of robust e-commerce platform was tailwind. Also, strong momentum across free shipment program led to robust shipments growth via Mercado Envios during the reported quarter.

Nevertheless, the company’s well-performing FinTech and logistics businesses are tailwinds. Further, its strong focus toward delivering enhanced user experience remains a positive.

Quarter in Detail

Brazil: Net revenues in the fourth quarter were $428.3 million (63.5% of total revenues), up 61.4% year over year. This can be attributed to improved gross billings, which surged 29.5% on a year-over-year basis. Further, gross merchandise volume (GMV) improved 23% year over year, owing to growing number of items sold in this region.

However, the company witnessed weak momentum in Brazil across Black Friday or seasonal campaign.

Argentina: This market generated revenues of $132.4 million (19.6% of revenues), which climbed 45.8% year over year. Gross billings in this country improved 40.9% from the year-ago quarter. Further, the company witnessed solid growth in GMV in this country, which soared 109% year over year owing to robust marketing campaigns.

Mexico: Net revenues in the reported quarter were $84.8 million (12.6% of revenues), up 86.4% year over year. This was primarily came on the back of robust GMV, which improved 53% from the prior-year quarter that can be attributed to solid execution of fulfillment operations, marketing investments and product assortment. Additionally, gross billings were up 91.1% from the year-ago quarter.

Other countries: These markets generated revenues of $28.7 million (4.3% of total revenues), surging 9.1% on a year-over-year basis. The company’s gross billings in these countries were up 9.8% on a year-over-year basis. GMV growth was flat on a year-over-year basis.

Key Metrics

GMV of $3.9 billion improved 19.7% year over year and 39.7% on FX neutral basis.

Total confirmed registered users at the end of the reported quarter were 320.6 million, improving 19.9% year over year. However, new confirmed registered users during the period were 14.6 million, declining 22.3% on a year-over-year basis.

Number of successful items sold was 109.5 million, up 27.9% year over year. Moreover, number of successful items shipped surged 49.1% year over year to 92.6 million. This can be attributed to strong performance of MercadoEnvios and optimization strategies for the company’s free shipping program.

Total payment volume (TPV) was up 63.5% on a year-over-year basis to $8.7 billion, driven by strong performance of MercadoPago in off-platform payments volume (online-to-offline), which grew 121.3% from the year-ago quarter. Further, the company gained traction in QR payments in Brazil and Mexico, which was a positive.

Additionally, MPOS business witnessed TPV growth of 126.1% year over year. Further, rapid adoption of MercadoLibre’s Mobile Wallet generated $1.3 billion in transactions. This marked the first time it crossed $1 billion mark and contributed significantly to the results.

TPV on marketplace was $3.7 billion, up 23.9% year over year. Further, total payments transactions increased 127.3% year over year to 285.5 million.

Unique buyers improved 26.8% year over year to 24.1 million. Moreover, unique sellers were 4.2 million, up 2.4% from the prior-year quarter.

Operating Details

For the fourth quarter, gross margin was 45.7%, contracting 210 basis points (bps) year over year. This can be attributed to rising warehousing costs and inventory costs on account of strong sales of MPOS devices.

Operating expenses as a percentage of total revenues came in 55.9%, expanding significantly by 790 bps year over year.

The company reported a loss from operations of $68.9 million, significantly wider than the year-ago quarter’s loss of $820,000.

Balance Sheet

As of Dec 31, 2019, cash and cash equivalents were $1.38 billion, declining from $1.42 billion as of Sep 30, 2019.

Short-term investments were $1.6 billion in the fourth quarter, down from $1.7 billion in the previous quarter.

Accounts receivable amounted to $35.4 million, up from $35.1 million in the third quarter. Further, inventory at the end of the fourth quarter was $8.6 million, up from $4.6 million at the end of previous quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -446.67% due to these changes.

VGM Scores

Currently, MercadoLibre has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, MercadoLibre has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.