Five Things to Watch at This High Growth Company

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mercado Libre (NASDAQ: MELI) will report earnings on Thursday after the close. The e-commerce leader in Latin America is an exciting investment alternative that could offer plenty of growth opportunities in the following years. 

The company is usually referred to as “the eBay (NASDAQ: EBAY) of Latin America" since eBay owns an 18.4% of Mercado Libre and the two business models are quite similar.  In the same way eBay is focusing on expanding PayPal to transactions beyond its own platform, Mercado Libre has an interesting opportunity in expanding its payment platform Mercado Pago into different business areas.

There are some important differences though, Mercado Libre operates through the whole Latin American region, and that means the company gets exposed to different currencies, economies and regulations. Currency effects and country-specific developments are important things to monitor in Mercado Libre.

Here are five important factors to watch regarding Mercado Libre in the coming earnings release:

1.       Volume Growth

The single most relevant factor to watch at Mercado Libre is units sold during the quarter. This variable is not affected by exchange rate movements or other transitory aspects and is a very relevant measure of operational growth. Just as an indication, during the quarter ended in June Mercado Libre increased items sold by a 35.6%.

2.       Payments Growth

We want to see payments through Mercado Pago growing faster than items sold, because that would mean that Mercado Pago is gaining ground versus other payments alternatives. Not only in terms of volume does Mercado Pago need to be monitored, but also when it comes to the monetary value of transactions, as more expensive deals made through Mercado Pago would mean that the platform is being trusted more by users. In the last quarter, payments volume through Mercado Pago grew at 39.1% annually.

3.       Profitability

Mercado Libre has big, fat gross profit margins, at the 73% level for the last quarter. However, as the lower margin business of payments gains participation in terms of business segments, gross margins could experience downward pressure over the coming quarters.

On the other hand, operating expenses have been growing less than sales in the last quarters, and this has a positive effect on operating margins. Currency movements are another factor that can affect profitability at Mercado Libre.

Profit margins at Mercado Libre can be affected by many different variables, so investors should monitor the big trends driving those numbers while not taking any particular quarter as a definitive data point.

4.       Competition

Competition is a serious concern for investors in Mercado Libre, especially coming from Amazon (NASDAQ: AMZN). The online retail giant has been gaining influence over the region, and there are strong rumors about the company increasing its presence in Brazil in the short term.

Amazon is especially strong in items like electronics, which is a big business for Mercado Libre too, so the stakes could be high here. Investors should pay close attention to management comments regarding the competitive threat from Amazon or other players and how Mercado Libre plans to defend itself versus the competition.

Discount sites like Groupon (NASDAQ: GRPN) have been growing strongly in Latin America over the last years. Groupon is the most popular player on a global scale, but smaller, locally focused alternatives are emerging at full speed. These alternatives don´t offer the same depth of services provided by Mercado Libre, but they do have some attractively low prices and are growing in popularity.

The relationship with Facebook (NASDAQ: FB) is another aspect to watch closely during the press conference. Facebook and Mercado Libre have been working together at integrating their platforms to a considerable degree over the last years. This collaboration has been beneficial to both parties, but now that Facebook is entering e-commerce with Facebook Gifts, things could get more complicated. Investors in Mercado Libre are probably hoping for more collaboration between the two companies as opposed to increased competition over the next years.

5.       Key Markets

The biggest market for Mercado Libre is Brazil, but Argentina and Venezuela are the second and third respectively. Both Argentina and Venezuela have produced very strong performance in the last quarters, imports restrictions is likely a positive for Mercado Libre, but heavy exposure to these countries is a reason for concern too.

High inflation, foreign exchange controls and strict government intervention in different sectors of the economy are common traits shared by Argentina and Venezuela. Investors should closely watch the company´s performance in these two countries to evaluate the possibility of a deceleration in growth or any disruptions coming from changing regulations in these nations.


 Bottom Line

We shouldn´t put too much weight on any particular quarterly report, but these announcements can´t be ignored either. Knowing what to look for and how to evaluate the different possibilities can be very helpful when it comes to putting the information in perspective and reaching effective conclusions from it.

acardenal owns shares of Mercado Libre and Amazon. The Motley Fool owns shares of, Facebook, and MercadoLibre and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend, eBay, Facebook, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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