Insights

Why MercadoLibre Stock Dropped Today

What happened

Shares of MercadoLibre (NASDAQ: MELI), the Latin American e-commerce giant, tumbled 4.4% through 10:15 a.m. ET on Thursday after investment bank Citigroup cut its price target on the shares by 23%, to $1,150.

Citi cited MercadoLibre’s plans to keep growing its proprietary credit cards business as the reason for the price target cut, reports The Fly.  

So what

MercadoLibre has always been more of an e-commerce marketplace than a credit card provider. Last year, commerce revenue surpassed $4.6 billion, while fintech revenue was only $2.4 billion, for example, according to the company’s 10-K filing with the Securities and Exchange Commission (SEC). But as fintech — and credit cards in particular — grow to make up a larger proportion of the company’s business, Citi worries that loan losses on those cards will also grow, potentially hurting profit margins for MercadoLibre as a whole.  

To date, however, this hasn’t been a problem for MercadoLibre, where profit margins flipped from negative in 2018 and 2019 to positive in 2020, and then grew to 6.4% in 2021. Still, Citi’s worry does make sense to the extent that more loans outstanding on credit cards does create at least the potential for more loan losses and lower profit margins.

Now what

Investors considering buying MercadoLibre should also be aware that the company — which remains much smaller in size than Amazon, but has already surpassed eBay in market cap — is generally favored by growth investors. Therefore, maintaining growth is going to be key to the stock’s success going forward.

In that regard, it’s worth pointing out that last quarter alone, sales in MercadoLibre’s fintech business more than doubled year over year, powering 67% sales growth for the company as a whole. It makes sense therefore that, if MercadoLibre is to have a chance of hitting analyst’s sales targets in the years to come — $10.4 billion in 2022, for example, $13.5 billion in 2023, and $23 billion in 2026 according to data from S&P Global Market Intelligence — then the company really does need to emphasize growth at its fastest-growing division.

If that means accepting somewhat lower profit margins on that revenue because of loan losses, that may just be a price MercadoLibre has to pay to hit its growth targets.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool recommends eBay and recommends the following options: short July 2022 $57.50 calls on eBay. The Motley Fool has a disclosure policy.

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