(Bloomberg) -- Shares of MercadoLibre Inc., the Latin American e-commerce and fintech giant, fell the most since May 2022 after missing profit estimates, shaving $17.4 billion off its market value.
The shares sank 16% after the company reported net income and other profit metrics that far trailed estimates on the back of increased investments in its credit business and logistics.
Still, most analysts remained broadly positive on the long-term potential for MercadoLibre and its ability to deliver on its stated goals to grow its dominance in online retail and become one of the region’s largest financial services provider.
MercadoLibre “has undergone several ‘show me’ moments in its recent history as it doubled down on some capital allocation decisions that raised questions and triggered intense stock selloffs over time,” Itau BBA analysts Rodrigo Gastim and Maria Clara Infantozzi, wrote in a report. “And the common denominator has always been its capacity to exceed return expectations, followed by strong stock bounce backs.”
Even after the selloff, the Montevideo, Uruguay-based company remains Latin America’s most valuable company, with a market capitalization of $89 billion, keeping its edge over Brazilian oil producer Petroleo Brasileiro SA.
In the third quarter earnings report released late Wednesday, MELI, as its known, said its overall credit book grew by 77% from a year earlier to $6 billion, with the portion tied to credit cards surging 172% over the same period.
Provisions set aside for all the lending cut into net income, which at $397 million fell short of the $513 million average estimate of analysts polled by Bloomberg.
The company also increased investments in logistics in the quarter while inaugurating five new fulfillment centers in Brazil and another one in Mexico, Chief Financial Officer Martin de los Santos said in an interview before the release. Overall revenue met expectations at $5.3 billion.
“This was a quarter of very large growth, but also investments in some of our strategic initiatives — one of which is credit,” de los Santos said. “The credit card is an important part of our fintech strategy.” While it probably adds “a little margin pressure year on year,” the company believes it’s “the right investment for the long-term growth opportunity,” he added.
MercadoLibre has 25 buy recommendations, three holds and one sell, among 29 analysts surveyed by Bloomberg. Its 12-month target sits at $2,349 compared with the closing price of $1,774.
While its commerce business represents about 60% of revenues, the company is pushing heavily into financial services through its Mercado Pago division, which does everything from processing payments to lending and offering deposit accounts that pay above-market interest rates.
Total users for its commerce arm rose to 61 million people while monthly active users for Mercado Pago was 56 million. Gross merchandise value, or GMV, was $12.9 billion in the quarter with Brazil and Mexico growing 34% and 27% respectively in local currency terms. Total payment volume was $50.7 billion.
“These pressures should prove largely temporary,” Goldman Sachs Group Inc. analysts led by Irma Sgarz said in a report. “However, we expect MELI shares to remain under pressure.”
On Wednesday’s call with analysts, MercadoLibre executives stressed that the investments will pay off in the future as logistics facilities delivery goods faster to a wider geographic area and credit cards issued to new cohorts turn profitable.
Some 1.5 million credit cards were issued in the quarter between Mexico and Brazil. The speed at which MercadoLibre is issuing cards in Mexico is greater than when it began in Brazil given the experience its gained in underwriting to price risk, Osvaldo Gimenez, the head of Mercado Pago, said.
“We believe the margin pressure is not an one-quarter event, but rather a higher level of investment that will pay off in the longer term,” JPMorgan Chase & Co. analysts led by Marcelo Santos wrote in a note, reiterating a neutral recommendation.
In Argentina, MercadoLibre continues to see a consumer recovery as the administration of Javier Milei attempts to stabilize the economy and the firm is boosting its lending on the back of it, according to de los Santos.
‘Benefit of the Doubt’
While MercadoLibre doesn’t disclose certain information by country, Mexican financial services is a bright spot at the moment, the CFO said.
“We’re seeing tremendous growth in the country in terms of number of users, in terms of assets under management, the credit portfolio — we had the largest credit portfolio of any fintech in Mexico,” de los Santos said.
Beyond logistics and credit, MercadoLibre had a one-off expense related to reimbursing certain clients from the fintech business. And while money was set aside to protect against potential defaults, asset quality on existing loans didn’t deteriorate in the quarter.
“This is not the first nor the last time that MELI suffers margin volatility on investments,” Joao Soares, an analyst at Citigroup Inc., said in a report. “And we believe the company has earned the benefit of the doubt when it comes to allocating capital.”
--With assistance from Leda Alvim and Vinícius Andrade.
(Recasts with closing share price.)
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