Competition in Latin American online retailing is heating up with Amazon.com ( AMZN) expanding in Brazil making for more downside risk for MercadoLibre ( MELI) shares.
The stock has slumped 4% today to $226.18 in U.S. trading following a KeyBank Capital Markets downgrade, even though investors are otherwise cheering the weekend election outcome in Argentina that is squarely in favor of the market-friendly government of President Mauricio Macri. The Global X MSCI Argentina exchange-traded fund ( ARGT) is up 1.2%. Analysts Brad Erickson and Elliot Arnson lowered their rating to sector weight, without a price target, saying a "margin hit is coming." They write:
"While we think concerns about competition from Amazon are now better appreciated, MELI's profit profile is becoming less attractive as a result of measures taken to grow faster and fend off competition. We still expect strong growth (we're raising our revenue estimates); however, we recommend investors move to a Sector Weight position as the company enters a multiyear profitability transition that could be a step function down.
What changed for us? Free shipping in Brazil is turning out to have a bigger impact than we'd anticipated, and recent signals from the company that free shipping in Argentina is next may fuel the bear thesis over competition that rattled investors so much last week. ... we'd thought that the Company was being entirely proactive around implementing free shipping; given the recent chatter around Amazon, this narrative has become significantly weaker for the foreseeable future. Amazon impact tough to quantify but likely now appropriately built in. ... our EPS estimates are now meaningfully below the Street's as we think: 1) gross-margin effect from Brazil and Argentina is not appropriately captured in Street estimates; and 2) we think marketing spending, in particular, has kicked up to a "new normal" to promote consumer awareness of free shipping..."
In addition, Piper Jaffray lowered its MercadoLibre price target to $268 from $287, citing slowness in listings growth in the third quarter. |
