Buy MercadoLibre Stock On This Post-Earnings Dip. Here's What the Market's Missing.

There's no denying that investors were less than thrilled with the third-quarter results MercadoLibre (NASDAQ: MELI) posted last week. Shares tumbled more than 16% on Thursday alone in response to the numbers, and are still well down from the pre-earnings peak at the time of this writing.

For investors who can look past all the post-earnings noise, however, this pullback is a buying opportunity. The market's ignoring an important detail regarding its recent (and near-future) results.

Big spending takes a bite out of profits

MercadoLibre missed its earnings estimates by a country mile, reporting a per-share profit of $7.83 versus a consensus estimate of $10. Although sales grew a firm 37% year over year and per-share income edged a little higher, it just wasn't enough. Soaring spending that led to a marked decline in operating income just rattled investors -- and understandably so.

There's more to the story, though.

On the off-chance you're reading this and aren't familiar with it, MercadoLibre is an e-commerce name serving the South American market. It's often referred to as the Amazon of Latin America, in fact, although that's far from a complete description. It's also akin to eBay, Shopify, and PayPal in that it allows customers to operate their own online stores, and process online payments. Indeed, MercadoLibre processed $50.7 billion worth of payments in the third quarter alone, up 34% from year-earlier levels.

The problem? Spending. There's too much of it. As the image below illustrates, spending on everything from research and development to marketing to administration was up. The company's "cost of net revenue and financial expenses" also grew far more than its top line did. Perhaps most alarming of all, MercadoLibre's provision for credit losses nearly doubled, as the organization makes a concerted point of expanding its credit card business. Add it all up, and operating income actually fell 29% during the three-month stretch ending in September.

Image source: MercadoLibre's fiscal Q3 2024 investor report.

The thing is, this was always the plan. And the plan is paying off. It's just not evident that it's paying off yet.

MercadoLibre is investing in growth

In simple terms, MercadoLibre is capitalizing on the growth opportunity at hand.

In many (although not all) ways, where South and Latin America are now is where North America was 20 years ago. Smartphone adoption there has exploded in just the past few years, for instance. Whereas Pew Research reports that 90% of adults living in the United States now own smartphones, market research outfit GSMA says Latin America's smartphone penetration rate was only 69% in 2021, en route to a still-modest prediction of 74% by 2025.

One key difference between the regions: Latin America is a "mobile first" market, meaning that for most people, their primary connection to the world via the internet comes from their mobile phone rather than a home computer.

Regardless of how they're going online, they're going online - and what they're doing once they're online isn't surprising.

As was the case in the U.S., online shopping and online banking are exploding in Latin America. Americas Markets Intelligence believes the region's e-commerce industry is set to grow 24% this year, and expand by 21% next year and another 21% the year after that. Online banking is following suit, with Technavio saying Latin America's banking-as-a-service market is poised for annualized growth of 20% between now and the end of 2028.

Plugging into this opportunity takes money, though ... which investors seem to have forgotten. As MercadoLibre's CFO Martin de los Santos told Reuters: "What probably happened is that the market did underestimate the amount of investments we are doing in credit card."

Now take another look at the snapshot of last quarter's income statement above. MercadoLibre is clearly spending more on growth. It's been doing so all year long, in fact, even if Q3's ramp-up in outlays accelerated its previous spending growth. But this increased spending is paying off. Although it's not yet boosted net profits, it is boosting revenue. Once more consumers and corporate clients are on board, the earnings will come. That's the word from the analyst community, anyway. It expects this company's per-share profit to more than triple last year's tally by 2026.

Data source: StockAnalysis.com. Chart by author.

Still more to like than not, including the stock's price

There are no guarantees, of course. The Latin American online banking and payment market could prove surprisingly competitive, with rivals like Nu coming on strong. More competition means more spending is required.

Look at the bigger picture, though. There's enough growth in store to go around. Moreover, as the region's online payment and e-commerce businesses mature and people are more familiar with both, MercadoLibre will actually be able to spend relatively less on marketing and product development. Last quarter's big jump in loan-loss provisions is also more of an outlier than not, stemming from the company's hyper-aggressive efforts to expand its credit card business.

In other words, this company's recent results aren't indicative of its likely future. They're the growth-driving exception to the bigger trend. Last week's tumble is a buying opportunity.

This might help: Analysts' current consensus price target of $2,381.29 is more than 30% above the stock's present price (as of this writing). The vast majority of this crowd also considers MercadoLibre a strong buy at this time, shrugging off last quarter's disappointing profits and the subsequent setback for MELI stock. They're clearly seeing something the average investor has seemingly lost sight of for the time being.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, MercadoLibre, PayPal, and Shopify. The Motley Fool recommends Nu Holdings and eBay and recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.