Amazon's Next Victim

May.29.12 | About: MercadoLibre, Inc. (MELI)

There are few things worse in business than facing a deep pocketed competitor that cares little for margins or profits versus gaining market share. Probably the best example of this type of competitor right now in American business is Amazon (NASDAQ:AMZN). It has undercut stalwarts Borders and Barnes & Noble (NYSE:BKS) in books, is now competing directly against Netflix (NASDAQ:NFLX) in movie rentals and is the main reason life is so miserable right now for Best Buy (NYSE:BBY). Based on job wanted postings and increasing rumors, Amazon's next major expansion looks set for Brazil. This will put the current ecommerce leader there, MercadoLibre (NASDAQ:MELI) in a much more challenging environment. At a minimum, Amazon's expansion will slow MercadoLibre's revenue growth and reduce its margins. Already Amazon has three of the top websites in South America despite not having a physical presence there. Given the valuation of MELI, if I were a shareholder; I would be extremely nervous.

"MercadoLibre hosts online commerce and payments platforms in Latin America. Its services are designed to provide its users with mechanisms to buy, sell, pay for, and collect on e-commerce transactions" (Business description from Yahoo Finance)

5 additional reasons MELI is overvalued at over $74 a share:

  • The stock sells for north of 10 times annual revenues and over 13 times book value.
  • Insiders have sold more than $100mm of shares over the last seven months.
  • The stock is selling near the top of its historical range based on P/B, P/S and P/CF.
  • MELI sells at more than 40 times trailing earnings. It also has missed earnings estimates three of the last four quarters.
  • Brazil's growth is slowing and economists forecast growth of under 3% in 2012. Consensus earnings estimates for FY2012 and FY2013 have already come down significantly for MELI over the last three months.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in MELI over the next 72 hours.