MercadoLibre Bulls Go All In With Stellar Rally Put to the Test

(Bloomberg) -- Analysts are boosting price targets for MercadoLibre Inc. after its earnings report showed Latin America’s biggest online marketplace well positioned to weather the stay-at-home economy.

Deutsche Bank, Morgan Stanley and Credit Suisse were among the dozen or so firms that raised their estimates for what the company is worth after profit more than tripled in the second quarter. The shares had already been on a tear, almost doubling this year and at one point making the Buenos Aires-based company the most valuable firm in Latin America.

The e-commerce platform thrived amid the pandemic, when lockdows shifted shopping online, boosting both its own merchandise sales and use of the payment services it sells to other retailers.

“It is very early days for e-commerce penetration in Latin America,” said Ignacio Arnau, a Madrid-based fund manager at Bestinver Asset Management. “MercadoLibre will clearly be among the main players if they keep up the good execution.”

The shares have surged more than 92% in New York this year to about $1,100, while the average price target compiled by Bloomberg is $1,168. But most of the analyst reports issued since earnings were released Aug. 10 have been more bullish.

HSBC Holdings Plc analyst Ravi Jain, whose recommendations on the stock produced the best returns over the past year, according to Bloomberg rankings, increased his target to $1,350 from $1,200, citing signs of a strong start to the third quarter.

Credit Suisse Group AG’s Stephen Ju is even more optimistic, saying the shares are worth $1,484.

The company, which operates e-commerce platforms in 18 countries in the region and has expanded into financial technology in the past few years, has also benefited from the worldwide preference for tech shares this year. That trade seems to be in the early stages of unwinding, which could pose a challenge to MercadoLibre’s future valuations. Shares dropped as much as 8.7% Monday, the most since March, even after the positive earnings report.

“Results will likely remain strong over the next quarters, but the tech-trade seems to be losing some steam globally and the risk-return ratio is less attractive than a few months ago,” said Aline Cardoso, a Sao Paulo-based portfolio manager at Trafalgar Investimentos. Cardoso still owns MercadoLibre shares, but has reduced her holdings after the stock’s recent appreciation.

MercadoLibre started July on a stronger footing than it did at the beginning of the second quarter across most markets, Chief Financial Officer Pedro Arnt said on the call Monday. The company has become more focused on Colombia and Chile, which posted a combined increase in gross merchandise sales of almost 200% in the past quarter.

Once the pandemic eases and shopping malls and stores reopen their doors, MercadoLibre will benefit from the momentum gained over the past few months as shoppers became more comfortable buying online.

MercadoLibre is the best-positioned company in the region to benefit from these opportunities in e-commerce and payments, said Malcolm Dorson, a money manager at Mirae Asset Global Investments in New York, who owns MercadoLibre shares.

“The balance of risks remains quite strong,” he said.

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