One Internet Stock No One is Talking About

By Ryan Guenette - July 22, 2012 | Tickers: AMZN, EBAY, FB, LNKD, MELI | 0 Comments

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Since Facebook Inc. (NASDAQ: FB) went public on Friday, May 18^th, 2012, all the talk on the street has been on Facebook and its competitors such as Linkedin Corporation (NYSE: LNKD). The world has been buzzing about the expensive errors made by the Nasdaq trading system, and the way Facebook has discouraged any investors that were getting ready to get back into the market. While as Facebook struggled to stay above its listing price and then broke through it to the downside, Linkedin has soared well north of its listing price. Another common topic of discussion has been the way companies such as Amazon.com Inc. (NASDAQ: AMZN) and eBay Inc. (NASDAQ: EBAY) have destroyed several old outdated brick and mortar stores by offering a wide selection of items that can be delivered to the consumer’s door in a timely fashion. Despite all this chitter chatter based around internet stocks, little to nothing has been said about Mercadolibre Inc. (NASDAQ: MELI).

Mercadolibre Inc. is the eBay of Latin America. Mercadolibre provides its users with devices for buying, selling, paying, collecting, creating leads, and comparing and contrasting listings through e-commerce transactions. Their slogan is even, “where to buy and sell all.” Mercadolibre Inc. operates in the countries of Argentina, Brazil, Columbia, Costa Rica, Chile, the Dominican Republic, Ecuador, the United States, Mexico, Panama, Peru, Portugal, Uruguay, and Venezuela. Mercadolibre’s four e-commerce services include: the MeradoLibre Marketplace, the MercadoPago payments solutions, the MercadoClics advertising program, and the MercadoShops on-line stores solution. Not only does Mercadolibre have a marketplace like eBay, it also holds a PayPal-like solution. So why should everybody be talking about this Latin American eBay?

Most Consistent Growth in Sector

The internet sector is one of the fastest growing industries in the market, but is one of the sectors most vulnerable to extreme shifts in growth because of their riskier business models. A railroad company makes money when it transports goods from one place to another, which is a business model that hinges on economic strength. Internet companies could see a huge drop in earnings because of a system error or a website that does what they do, just bigger and on a grander scale. This is exactly what happened to myspace.com. Facebook.com was created and nearly wiped out the, now tiny, data sharing website. The internet sector is an extremely risky one, but Mercadolibre Inc. has the most consistent and reliable growth in the sector, being the only company that is expected to grow earnings per share each and every year in the foreseeable future. Mercadolibre does not have the caliber of growth that is anticipated from Linkedin, but has a more realistic and dependable growth rate.  

Earnings per Share Comparison

Based on a $1 Starting Price

Earnings per Share Growth Rate Comparison

Is Mercadolibre Worth It?

In an industry with explosive growth, such as the internet industry, companies can quickly increase in value and get inflated well past what the company is worth in fair value. This phenomenon is known as a bubble, and when the bubble bursts the companies involved in the bubble come crashing down. A way to measure if a company is worth what the market has priced it at is to examine the company’s price to book ratio compared to some of its competitors that have similar growth and risk profiles. All statistics are based on the current prices: MELI $68.78, FB $27.41, LNKD $102.96, AMZN $215.71, and EBAY $38.91. The ratios are contingent on the fact that the prices remain the same. The lower the price to book ratio, the less the investor is paying for future growth. A higher price to book ratio usually indicates a higher growth company, while a lower ratio represents a company with slower growth. 

Price to Book Ratio Comparison

Book Value per Share Comparison

Based on a $1 Starting Point

Mercadolibre does have a relatively high price to book ratio, but has the fastest falling ratio in the industry. In 2010, Mercadolibre had the highest price to book ratio, but by 2014 Mercadolibre’s price to book ratio is expected to be nearly the second lowest. Additionally, Mercadolibre is expected to create the most book value per share over the coming years, turning one dollar of book value in 2010 to nearly $3.50 of book value in 2014, making Mercadolibre the fastest growing company in the sector based on the book value per share growth rate. Mercadolibre will create this book value from extensive growth in all regions of operation, as more and more people with more and more money in these emerging markets turn to the internet for there needs. The more value Mercadolibre creates in book value per share, the less an investor will have to pay for future growth to take part in Mercadolibre’s long-term upward move.  

What Mercadolibre Has That No One Else Does

The internet industry is a fast growing and volatile one. Usually, in an industry such as the internet one no dividends are paid out, as the companies are growing so quickly they do not see a need for a secure source of income for their investors. On most cases, dividends are paid out in slow growing industries they have nothing to offer to their investors except slow to moderate growth. Going against the grain is Mercadolibre Inc. Currently, Mercadolibre Inc. pays out a quarterly dividend of $0.11, or an annual dividend of $0.44, which at current prices yields 0.62%. A 0.62% dividend yield is not going to make Mercadolibre an income investor’s stock, but will add some substantial value to the company. In 2013, Mercadolibre’s dividend is expected to reach $0.53 annually, representing an increase of 20.45% year over year dividend growth. Mercadolibre’s dividend does not within itself make the company a great long term investment, but does add some value to Mercadolibre’s stock. The graph below displays Mercadolibre’s earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

The Foolish Bottom Line

The internet industry is a tough industry to operate in. One day a company could be the most searched on Google, and the next could be outperformed by a bigger and better solution. Mercadolibre Inc. has a proven business model; as eBay has been operating the marketplace and PayPal system for years upon years successfully, and is operating in one of the fastest growing regions in the world, Latin America. Despite the roadblocks Mercadolibre Inc. may face, such as volatility in emerging markets and risks related to currency exchanges, Mercadolibre Inc. is a high growth company that will benefit from the shift to internet shopping. As a long term investment, Mercadolibre Inc. is perfect, and should be the topic of discussion in every Wall Street conversation.         

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