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MercadoLibre Hits 6-Month Low as Marketing Expenses Hurt Margin

MercadoLibre Hits 6-Month Low as Marketing Expenses Hurt Margin

(Bloomberg) -- The Latin American e-commerce retailer MercadoLibre Inc extended a two-day slide after higher marketing expenses hurt profitability in third quarter, offsetting a strong top-line and positive news from its payments segment.

Shares of the Buenos Aires-based company fell as much as 6.1% to below $90 in the U.S. to the lowest since early May.

“Higher-than-expected marketing-related expenses and significant credit-quality deterioration in the still-incipient Brazilian credit business” were among the weak spots in the quarter, Itau BBA analysts led by Rodrigo Nistor wrote in a report, reaffirming an underweight rating for stock. “The payments segment was again a positive surprise.”

Mercado Libre is still seeing high levels of bad debt in Brazil consumer credit, Chief Financial Officer Pedro Arnt said on the earnings call Thursday. As a result, it’s tried to mitigate Brazilian losses through adjustments to its pricing and scoring models, but continues to suffer from higher marketing expenses and tax losses in Mexico and Colombia, Arnt said.

“The extent to which investors may take fright from the significant ramp-up in marketing investment is unclear,” Bradesco BBI analysts led by Richard Cathcart wrote in an Oct. 31 report. “But we note that management has a strong track record of generating payback from such decisions.”

Here’s what Wall Street analysts have to say:

Barclays, Deepak Mathivanan

  • While key performance indicators continue to be strong in the fintech segment, GMV growth in Brazil came in below our forecast
  • Ebitda loss was meaningfully higher than anticipated as the firm kicked off its new branding campaigns
  • “Overall, 3Q was a mixed print, but the strong performance in the fin-tech business triumphs the noise in other areas”
  • Price target to $660 from $700; overweight maintained

Bradesco BBI, Richard Cathcart

  • Sharp rise in marketing investment and some pressure from bad debts in Brazil
  • Results are consistent with outperform rating
  • “With unique marketplace buyers and active wallet payers growing at such an accelerated rate, we remain confident that MercadoLibre can maintain its leadership in e-commerce and build a competitive advantage in payments”

Cowen, Tom Champion

  • Results look good but less strong than prior quarters
    • Price target cut to $596 from $651; market perform reiterated
  • MercadoLibre’s results were impressive again this quarter with payments volume beating Cowen’s estimate
    • But Brazil GMV growth decelerated and gross margins and operating margins missed Cowen forecasts

Itau BBA, Rodrigo Nistor

  • MercadoLibre reported a mixed set of results
  • Payments segment was again a positive surprise
  • Higher-than-expected marketing-related expenses and significant credit-quality deterioration in the still-incipient Brazilian credit business were among the weak spots
  • Underperform rating maintained

What Bloomberg Intelligence says

“MercadoLibre surprised with a return to operating losses as marketing costs spiked and bad loans increased in Brazil merchant credit. Higher marketing spending accounted for 80% of the jump in operating expense, but was a strategic move to build the marketplace brand after delivery improvements and to broaden awareness of MercadoPago”
-- Julie Chariell, senior consumer products analyst
-- Click here for the research

--With assistance from Carolina Millan.

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Scott Squires in Buenos Aires at ssquires4@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Scott Schnipper

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