1 Stock Down 14% to Buy on the Dip

MercadoLibre (MELI +3.21%), an e-commerce platform operating in Latin America, has faced significant headwinds over the past year. The company’s latest quarterly update sent yet another warning to investors, as it missed bottom-line analyst estimates. The stock is now down 14% over the trailing 12 months.

Despite the challenges, though, MercadoLibre could be a terrific stock to buy and hold, especially on the dip.

Image source: Getty Images.

MercadoLibre’s obstacles

MercadoLibre is the leading e-commerce player in Latin America. But it has been dealing with increasing competition, most notably from Shopee, an online platform owned by Sea Limited. Even with a leading market share, MercadoLibre has seen its business suffer amid Shopee’s successful efforts, partly thanks to its offering competitive prices.

MercadoLibre’s fourth-quarter sales were strong. The company’s revenue jumped 45% year over year to $8.8 billion. However, MercadoLibre’s net income declined to $559 million, down 12.5% year over year and coming up short of analysts’ estimates.

Considering the mounting competition in recent quarters and the declining net income in its latest period, it’s not too surprising to see MercadoLibre’s shares moving in the wrong direction.

MercadoLibre Stock Quote

Today’s Change

(3.21%) $55.02

Current Price

$1769.03

Why the stock is still a buy

Part of why MercadoLibre underperformed on the bottom line during the period is that it was investing in the future. The company is countering Shopee’s progress in the region with strategic moves that could help strengthen MercadoLibre’s ecosystem and, by extension, its economic moat. These investments may cost a lot of money up front but could pay for themselves down the road as consumer demand grows and margins improve.

But what exactly is MercadoLibre doing? Consider three important moves the company has made.

First, it lowered the free shipping minimum. Extending this service to more items and customers isn’t cheap, but it will help boost the company’s gross merchandise volume.

Second, MercadoLibre is also expanding its credit business (in a region where banking is less developed than in many other countries), which, the company believes, presents an attractive long-term growth avenue.

Lastly, MercadoLibre is doubling down on artificial intelligence and implementing AI-powered changes across its business, from fintech to advertising.

The lower earnings and margins in the short run are worth it if MercadoLibre’s initiatives pay off later, and given the large addressable market in the region, there are good reasons to believe they could. Latin America has been one of the fastest-growing e-commerce regions in recent years.

So, for investors willing to be patient, MercadoLibre’s shares are worth buying on the dip, as the company, riding the e-commerce space in Latin America, could help deliver strong returns over the long run.

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