MercadoLibre
MELI
, a Zacks Rank #5 (Strong Sell) stock, operates online commerce platforms in Latin America. Its various products enable businesses, merchants, and individuals to list merchandise and conduct sales and purchases online. MELI also offers a financial technology solution platform which facilitates transactions by allowing its users to send and receive payments electronically. In addition, the company provides a digital storefront where users can setup, manage, and promote their own digital stores. MercadoLibre was incorporated in 1999 and is based in Uruguay.
The Zacks Rundown
MELI has been severely underperforming the market over the past year. The stock topped out all the way back in January of last year and has been in a price downtrend ever since. Shares are hitting a series of 52-week lows and represent a compelling short opportunity as the market continues its volatile start to the year.
As a general rule of thumb, we want to target stocks in the top-performing industries. Historical research has shown that roughly half of a stock’s future price appreciation is due to its industry grouping. We therefore want to avoid stocks in the bottom 50% of all Zacks Ranked Industries. Candidates in the bottom half of industry groups can often represent solid potential short candidates. While individual stocks have the ability to outperform even when included in poor-performing industries, their industry association serves as a headwind for any potential rallies.
MercadoLibre is part of the Zacks Internet – Commerce industry group, which currently ranks in the bottom 39% out of approximately 250 industries. Because this industry is ranked in the bottom half of all Zacks Ranked Industries, we expect it to underperform the market over the next 3 to 6 months.
Recent Earnings and Future Estimates
Earnings misses have been a sore spot for MELI during the past year. The e-commerce provider has fallen short of estimates in each of the past two quarters. MELI most recently reported Q1 EPS back in May of $1.30, missing the $1.66 consensus estimate by -21.69%. During the fourth quarter, the company missed the $0.89/share estimate by -203.37%, posting a loss of -$0.92/share in the process. When you’re missing earnings estimates by that wide of a margin, you’re going to be fighting an uphill battle when it comes to the stock price.
Analysts have been revising earnings estimates downward as of late. For the second quarter, estimates have been slashed by -4.95% over the past 60 days. The Q2 Zacks Consensus EPS Estimate now stands at $1.73. Consistently falling short of earnings estimates is a recipe for underperformance, and MELI is no exception. These are the types of negative trends that the bears like to see:
Image Source: Zacks Investment Research
Technical Outlook and Valuation
MELI stock has been steadily falling since last year and has now established a well-defined downtrend. Notice how both the 50-day (blue line) and 200-day (red line) moving averages are sloping down. Shares have declined more than 56% in the past year. The stock continues to trade below both averages, while the 50-day moving average has acted as steady resistance throughout the down move:
Image Source: StockCharts
MercadoLibre has continued its descent into the new year, with shares falling over 51% year-to-date and showing no signs of a reversal. The death cross, a technical pattern in which a stock’s 50-day moving average crosses below the longer-term 200-day moving average, occurred late last year.
Despite the underperformance, MELI is still relatively overvalued, irrespective of the metric used:
Image Source: Zacks Investment Research
Final Thoughts
Our Zacks Style Scores illustrate a deteriorating investment picture for MELI, as the company is rated a worst possible ‘F’ in Value and has an overall ‘C’ VGM score. Recent earnings misses signal more trouble on the horizon. The fact that MELI is included in a bottom-performing industry group simply adds to the growing list of concerns.
Falling future earnings estimates are a big red flag and need to be respected. These will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend. Potential investors should only think about including this stock in their portfolio as part of a hedge or short strategy. Bulls will want to steer clear of an overvalued MELI until the situation shows major signs of improvement.
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