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MercadoLibre’s Price Target

Posted on Thursday, Jul 10th 2008

I haven’t written about MercadoLibre in a while … yesterday, Eric Savitz reported over at Barron’s that Mercado’s CEO Marcos Galperin terminated an over 1.7 million shares stock sale plan, which sent the stock up $4.44, or 16.6%, to $31.23.

MercadoLibre (NASD: MELI), the combination of eBay and Amazon of Latin America,  announced their Q1 earnings a couple of months ago. With revenues of $28.8 million, they recorded 75% growth over the previous year and 7% growth sequentially despite the seasonal impact of Easter in the quarter. The Street was expecting revenues of $26.7 million.

By segment, Marketplace revenues grew 65% over the year to $23.5 million and Payments revenues grew 137% to $5.4 million. Net income for the quarter was $2.1 million, representing an EPS of $0.05, substantially short of market expectations of $0.10.

Mercado added 1.6 million new confirmed users in the quarter, taking their total user base to 26.5 million. Their gross merchandise volume increased 44% to $450 million and the total payment volume increased 96% to $52 million for the quarter.

In the quarter, Mercado benefited from their acquisition of Tu Carro, where they realized synergies in IT and back-end integration. They also launched their new payment platform, MercadoPago 3.0, in Argentina after having successful launches in Chile and Colombia in the previous quarter.

According to Galperin, MercadoPago 3.0 “removes the escrow and shifts the payment of the processing fees from the buyer to the seller, thereby making the process faster and more compelling.” It enables payments both inside and outside of their platform, thus expanding the company’s addressable market. Mercado will be launching the platform in other countries during the rest of the year.

comScore Media Metrix ranked Mercado as a market leader in Latin America in the online retail space. With Latin American economies gaining investor confidence – Brazil was recently granted investment grade status by Standard and Poor’s – Mercado’s performance is likely to improve.

Mercado’s growth is spurred by increasing Internet, broadband, wireless, convergence and PC penetration in Latin America. In my interview with Galperin, he talked about the days when Internet penetration was only 3%. Today, the South American region has over 25% Internet penetration.

According to a Global Information report, in 2003, there were only 2.7 million broadband subscribers in Latin America; by the end of 2007, that number had increased to 19.4 million. The world average for broadband penetration is 5.9 lines per 100 inhabitants. As Latin American penetration is still only 3.4 lines, there is further growth potential.

The stock had been beaten down too far of late, for no particular reason or rationale. It is very likely to climb back up to at least the forties. More importantly, this is a long-term hold company.

1yr MELI

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