MercadoLibre slid nearly 4% Tuesday and dipped below its 50-day moving average, yet the stock continues to form a base. The Latin America online retailer is the IBD Stock of the Day.
The company missed second-quarter earnings expectations last month. MercadoLibre blamed seller discounts and its decision to lower the minimum checkout costs for free shipping in Brazil, its largest market.
Those changes hurt margins, but the company noted an acceleration in items sold in Brazil after the new shipping policy.
Other parts of the second-quarter report were positive. Total gross merchandise volume rose 21% to $15.3 billion. Total payment volume for MercadoLibre's fintech business grew 39% to $64.6 billion. Sales rose 34% to $6.79 billion, above estimates.
Originally considered Brazil's eBay, but now more often compared to Amazon.com, MercadoLibre operates an e-commerce platform in most of Latin America. MercadoLibre also has a fintech, called Mercado Pago, that offers a digital wallet popular in the region.
Analyst reactions were mixed after the earnings report.
Wedbush reiterated a buy rating but lowered the price target to 2,700 from 2,800. JPMorgan raised the price target to 2,700 from 2,600 and kept a neutral rating. Several others made no change to their price targets.
Most Analysts Are Bullish
Of 26 analysts who cover MercadoLibre today, 23 have buy ratings and the rest have hold ratings. The average target price is 2,903 — a potential upside of about 22% from Tuesday afternoon's quote of 2,381.80.
For the full year, analysts' consensus earnings estimate is $45.19 a share, an increase of almost 20%, according to FactSet. Sales are estimated to climb 35.4% to $28.132 billion.
MercadoLibre has an impressive roster of institutional ownership, with nearly 3,600 funds holding the stock as of June, according to IBD MarketSurge.
Those holdings include five funds in the IBD Mutual Fund Index. Fidelity Contrafund (FMAGX) put 1.38% of its portfolio in MercadoLibre, as of the latest data. It also made up 5.25% of the Virtus KAR Mid-Cap Growth Fund (PHSKX).
Among the most notable and newest investors is Scion Asset Management, the hedge fund run by Michael Burry, a character in the book "The Big Short" and subsequent film about the 2007-08 mortgage crisis. In an Aug. 14 SEC filing, the fund disclosed owning 3,000 shares, worth about $7.84 million.
MercadoLibre Stock Analysis
MercadoLibre, which is based in Uruguay, has an IBD Composite Rating of 97, one of the highest in the internet retail industry group. The EPS Rating (92) is also among the best in the group. But the Relative Strength Rating is 71, in the middle of the pack.
Although MercadoLibre is forming a flat base, the stock has met resistance around the 2,500 level. A move above that level would provide an early entry, and certainly would be a prerequisite for the stock to break out above its flat-base entry at 2,645.22.
The relative strength line is lagging the stock price, which is another risk to consider.
MercadoLibre stock has a 21-day average true range (ATR) of 3.11%. The average true range is a metric available on IBD's MarketSurge that gauges the characteristic breadth of a stock's behavior. Stocks with a high ATR tend to make large price moves that can trigger sell rules. Stocks with lower ATRs tend to make more incremental moves.
With the S&P 500 and Nasdaq now in a power trend, investors can buy stocks with ATRs up to 8%, though they should be wary of being too concentrated in high-octane names.
