Why Now Is Not the Time to Get Greedy With MercadoLibre Stock

For years, MercadoLibre, Inc. (NASDAQ: MELI) has been an excellent stock to own.

Until its recent slide, the stock had more than tripled over the last five years on the back of rapidly growing revenue and profits. Often dubbed the Amazon (NASDAQ: AMZN) or eBay of Latin America, it's easy to see why MercadoLibre has been such a success story as the company is the e-commerce leader in a developing region. Investors seems to finally be realizing the potential of e-commerce stocks as companies like Wayfair and Shopify have surged, and of course, Amazon has been one of the best companies to own over the last two decades.

MercadoLibre's business is admirable in a number of ways as its marketplace model -- much like eBay, the company only serves as a platform for third-party sellers -- generates wide margins, and it also has its own MercadoPago payment platform.

Revenue jumped 59% in its most recent quarter to $316.5 million, though profit growth was slower as the company launched free shipping and loyalty programs.

Despite MercadoLibre's strong position and momentum, its biggest weakness revealed itself last week when shares cratered on a news report.

Here comes Amazon

MercadoLibre stock has fallen roughly 11% since Brazilian newspaper Valor Economico reported that Amazon was considering expanding its operations in Brazil. According to reports, Amazon will begin selling electronics as soon as this week and will add other categories by the end of the year. It's also hiring for a number of positions, a further sign of its growth ambitions.

Currently, the e-commerce giant only sells books and operates a marketplace in Latin America's largest country.

MercadoLibre derives about half of its revenue from Brazil, and not surprisingly, this is a risk MercadoLibre bulls have long anticipated as Amazon has threatened retailers across the spectrum and around the world. Whether Amazon can make a meaningful dent into MercadoLibre's growth is an open question, but one thing is for sure -- all it takes is a glance from Amazon and retail stocks shudder.

Last week, pharmacy stocks sold off on reports that Amazon was looking to get into the drug business. Sportswear stocks like Luluemon also dipped on word that Amazon would make its own private-label athletic wear. Supermarket stocks got walloped after Amazon announced it would acquire Whole Foods Market in June, and fears of Amazon are so prevalent that Costco Wholesale saw its stock slide after its most recent earnings report even though it beat estimates on revenue and earnings and posted 6% comparable sales growth. Investors were apparently worried about Amazon moving into Costco's territory.

The issue with Amazon is that it's not just a fierce competitor and a dominant force in retail, but that the company plays a different game from most businesses. It's content to operate at breakeven, forgoing profits in order to establish customer trust and build market share. When it enters a market, margins almost always get compressed, which means that a competitor like MercadoLibre is likely to suffer even if it successfully fends off Amazon.

The e-commerce leader is also increasingly focused on international markets. It's reportedly plowed $5 billion into the Indian market, in the hopes of asserting supremacy over local operators like FlipKart and Snapdeal, and acquired Souq.com, the largest e-commerce business in the Middle East, earlier this year for $650 million.

At this point, Amazon's aspirations in Brazil and elsewhere in Latin America aren't fully clear, and the company has a long list of priorities. But as the regional e-commerce market grows, and MercadoLibre's gross merchandise volume is set to top $10 billion this year, Amazon's interest will likely increase as well. Mercaodlibre defines gross merchandise volume as "the total U.S. dollar sum of all transactions completed through the Mercado Libre Marketplace, excluding motor vehicles, vessels, aircraft, real estate, and services."

As investors in other retail stocks have discovered, all it takes is the specter of Amazon's entry into a market and stocks will dive. With that threat now clearly facing MercadoLibre, the company will have to perform that much better in order to shake off any doubts, and with a price-to-earnings ratio north of 70, the stock could fall a ways if growth slows. MercadoLibre could still thrive even with pressure from Amazon, but after the recent announcement and investors' reaction, this looks like an especially risky time to get greedy with the stock.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, eBay, MercadoLibre, Shopify, and Wayfair. The Motley Fool recommends Costco Wholesale and Lululemon Athletica. The Motley Fool has a disclosure policy.