MercadoLibre Stock Upgraded (Finally!): What You Need to Know

By Markets Fool.com

It's been about a month now since MercadoLibre (NASDAQ: MELI), "the Argentinean Amazon.com (NASDAQ: AMZN)," reported its fiscal Q2 financials. Two months since the company either missed badly on earnings (according to StreetInsider.com's write-up), or else, didn't miss so badly at all (also according to StreetInsider). Whichever read you want to take on the news, though, investors' reaction was clear: They loved the results.

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Since reporting its results four weeks ago, MercadoLibre stock has run up 21.5%, and this morning, the shares are spiking again on a positive note out of investment banker JPMorgan.

Here's what you need to know about that.


E-commerce is booming in Argentina, and taking MercadoLibre stock along for the ride. Image source: Getty Images.

1. You aren't the only one confused

Bankers didn't quite know what to make of MercadoLibre's results, either, and have taken their sweet time figuring them out. In the four weeks since MercadoLibre reported its Q2 earnings, there have been a couple increases in price targets, and one new initiation of coverage (at neutral), but up until today, no one was sufficiently convinced of the stock's promise to actually upgrade it.

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That changed today, when JPMorgan weighed in with an upgrade to overweight and a new price target of $200 a share -- $67 higher than its previous estimate.

2. What JPMorgan likes

Why the upgrade? Why the huge boost in target price? According to TheFly.com, JPMorgan is placing a big bet on MercadoLibre "gaining market share" in a "thriving" Brazilian online marketplace. (Not a typo, by the way. While MercadoLibre stock is listed in Argentina, Brazil is actually a bigger market for them, and the company does business throughout south and central America.)

Last quarter, MercadoLibre reporteda 20% year-over-year increase in its number of registered users, a 29% spike in quarterly sales, 45% growth in the number of items sold, and 76% increase in payment transactions. Only income, reported in strong U.S. dollars, declined -- 18.5%. (But JP thinks earnings will resume growing shortly, and that this will drive further share price growth.)

3. What JPMorgan doesn't like

If there's one thing that appears to give this banker pause, it's the "rich valuation" of MercadoLibre stock.

Currently, MercadoLibre shares sell for more than 62 times earnings. Compare that to less than 20 times earnings at eBay (NASDAQ: EBAY) -- eBay owns 18% of MercadoLibre's stock,by the way -- but a valuation of 193 times earnings at Amazon.com.

And yet, JPMorgan is telling us that MercadoLibre stock will get even more richly valued, rather than less. So how does that work?

The most important thing: Valuation

Comparing MercadoLibre to more familiar peer companies may help to lend a clue. At 62 times earnings for example, you might say that MercadoLibre costs 3 times more than eBay. And yet, according to the good folks at S&P Global Market Intelligence, we also know that MercadoLibre is expected to grow its earnings at better than 24% annually over the next five years -- whereas eBay will grow at only 7%. So right there is one good explanation for why MercadoLibre stock costs 3 times more.

Moving up the valuation ladder, Amazon.com, at 193 times earnings appears to cost 3 times more than MercadoLibre. And yet, S&P Global pegs Amazon's growth rate at 53% -- only roughly twice MercadoLibre's assigned growth rate. If you take it as a given, therefore, that U.S. investors are valuing Amazon.com stock correctly, then it follows that MercadoLibre stock, growing half as fast as Amazon, but costing only one-third as much, may be underpriced.

So what's the upshot of all this? At 62 times earnings, and a price-to-free-cash-flow ratio that's even more expensive, MercadoLibre stock is definitely not cheap. But when compared to the alternatives, it's not necessarily expensive, either. As a certified cheapskate, it's not a stock that I would buy, but if the high price doesn't scare you, you might want to give it a try.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 295 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends Amazon.com, eBay, 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.