Mercado Libre: Overhyped

Back in March I wrote this post about Mercado Libre (MELI), Latin America's answer to eBay (EBAY) (or so we're told by.....errr...Mercado Libre). Since then I've mentioned it again, particularly when its 1q08 results totally sucked and when I shorted it some.

Well, it seems those slowcoaches at Barron's have cottoned on to the fact that MELI is just a hypemachine. Regular reader DH sent me this article that was published in Barron's on the 4th of June (thanks DH) that calls into considerable doubt the current valuation of MELI. Go read the Barron's note yourself, but the final paragraph reprinted here just about sums up the feeling:

...To be sure, Mercado is one of the more attractive high-growth stories in emerging markets, for investors with a stomach for risk. But for those who remember the disappointments of a still-young Internet in the U.S., the stock's lofty price tag begs for caution.

I couldn't agree more with the writer. Or should that be "he couldn't agree more with me," as your autotrumpet-tootin' Otto nailed this view weeks ago? Meanwhile, on the subject of hyped-up technology thingies, have a look at this chart illustrating the now famous "Gartner Hype Cycle" for technology issues.

 

Named after a dude called Gartner (duh), it shows how new tech ideas get pumped, dumped and then adopted into the mainstream of the business world. Now look at the MELI stock evolution since its IPO last year. Coincidence?

 

Otto sez: MELI is still somewhat overpriced at U$44 right now, but is a good stock to trade both ways. If it gets oversold to, let's say U$30, go long on it because it's not going Chap11 no way José. On the other hand, anything above U$52 (or maybe U$55...your call is as good as mine on ST stuff) will give you a chance to short it back down, as the pump merchants move in and out of the stock. Right now it holds no value, but it's one to keep an eye on, that's for sure. Just be smarter than the sheep, ok?

Disclosure: No position in MELI.

Comments

[User 207017:]

your article is interesting. I dont know what "overhyped" is referring to however. If this means a price of $150 by year's end - then yes its overhyped - I agree. However $60-65 by the end of the year....likely - in my opinion. I however tend to think that the key for this company is revenue (top line) more than bottom line at this point. As a young company they will have lots of discretionary spending so they may miss bottom line consensus - but they did for q1 the stock dropped from $54 to $50 in after hours but during the course of the day, the next day it rose. As the conference call said during Q1 earnings, those discretionary spending dollars can be adjusted and brought down but right now its about building a name and momentum ie the commercials currently running. Interesting to note is that if you go to alexa.com and you type in the website mercadolibre.com to see the website's stats what you will notice is that the site goes from being about the 3000-3500th most popular site globally for several months and shoots up to number 2000 globally in the past couple of weeks (click the rank tab) - by the way the "reach" and "page views" also shoots up. This coincides with the company's marketing campaign which begain in late April (the big rise takes place in early May) according to the q1 earnings call. So at the very least, their marketing campaign seems to be off to a strong start. This is the type of thing that will continue to push up top line performance - revenue. The bottom line will come. Just my thoughts. I dont own it but its one i have been following. One problem i found with Barrons is that they completely discount the possibility of people using the site more than once. Like E-Bay, the company has users who use it multiple times so even though the company is growing faster than the internet penetration rate - people can and do use it more than one time - Barron's just looks at the penetration rate and discounts multiple uses. Finally, as far as the company's longevity, they just one 3rd place in best companies to work for in South America - so they are doing things (outside of the financials) which bode well for it. I dont know about shorting and going long at certain prices - but I would just be wary about discounting it too much. I tend to watch the options market to see where the stock is heading because its so thinly traded, large positions and holders can and do move this stock. Cheers,

2008 Jun 08 08:13 PM

[User 207017:]

I agree completely with the above comment. I think the stock will be hitting $60 by the time the company reports its q2 numbers. The Barron's article is quite positive on the stock. It just notes to be cautious ....as one should be all the time when investing. As the comment notes above, there is no mention of people using MELI multiple times, which we know does happen. Furthermore, i checked out alexa and its true the company has had a dramatic rise in its global rank and is upward trending - I also looked up mercadopago.com and the same thing is true - its had a dramatic rise. Furthermore, if you go to the yahoo page for the stock, under this blog is the blog that talks about the company's desire to improve their revenues first until they reach a critical mass - which wont happen until they launch Pago in all their markets, have their marketing campaign going in full swing. I dont think the stock is overhyped now as it was a few months ago. Did it get ahead of itself last year? Sure but now its moving up at a more reasonable rate. Dont forget they are also in discussions with google regarding the orkut site (the facebook of brazil and top website in brazil). If they can have the ability to link from that site it would also provide a dramatic rise in revenue. There is alot of positives and momentum for this stock as Barrons notes - I think if one has some patience, they wont regret it. By the way, the chart above is indicative of most tech stocks including ebay, google, amazon and bidu etc etc. and visa, and mastercard too. Who doesnt wish they had Mastercard at its IPO price.....

2008 Jun 08 08:55 PM

[lobodoug:]

Yes, brilliant with the Gartner curve thing. I see that in other early tech stocks. Like Microsoft in 1986..... Return if you bought at the peak of the early "hype" in June, 86, just before the "trough of disilllusionment": about 22,000% Return if you bought on the bottom of the trough: about 30,000%. I bet those guys who bought too early are really kicking themselves in the ass for their stupidity!!!

2008 Jun 08 09:19 PM

[LBC:]

1Q08 results were outstanding. The headline EPS "miss" was due to tax rate issues and a one-time non operating expense. All the key operational metrics improved unequivocally. Shoddy analysis on your part.

2008 Jun 09 08:54 AM

[jimmydasaint:]

Overhyped? Just proof again that this stock market moves on news not based on facts. This stock would be much higher right now if it wasn't a victim of tax hikes to deflate their number last quarter.

This stock is going to BLOW OUT 2nd Quarter earnings and will creep up back to $55.00 in no time!

Jimmy Da Saint

2008 Jun 11 07:51 AM

[mikemichaelson:]

I have to say that this is the worst article I've ever read by any "investment analyst". I'm not invested in MELI but have some respect for yourself.

How about some concrete evidence on why the most recent quarter "totally sucked". How about projecting revenues, earnings, and cash flows out over the next few years and using that to back up your thesis as to why the stock is overvalued.

The argument you make for a "coincidental" similarity between the Gartner chart and the chart of the stock is so ridiculous that if the "totally sucked" line didn't raise some questions to readers as to the validity of you the author, then clearly this would have.

I'd suggest using some stats and research (funny term, research, isn't it?) before posting a self-serving article about MELI (while you don't have a position, are you looking to enter at a lower price?). Have some accountability. Please.

2008 Jun 14 02:06 PM