Back on November 20th, we did a Deep Dive post on MELI, with the following conclusion:
In sum, the macro risks for Latin America are well known, and MELI has grown admirably in spite of them. The recent quarter’s miss was discouraging on the margin front, and gross margins and operating margins are both now near multi-year lows. But the stock’s sharp decline has lowered expectations going forward. For the short-term trader, playing for a bounce from the 100-105 area seems like a good risk/reward setup. For a long-term investor, the bull vs. bear argument seems to yield a neutral conclusion for now.
We never put on a trade in the stock because we were not comfortable with the valuation and the deteriorating situation in Venezuela and Argentina, even as the stock neared that 100-105 support level. Since then, the stock did attempt a bounce on several occasions near $100 (red line), but it has failed each time:
At this point, MELI looks technically broken, with the 200 day ma now downward sloping for the first time in a year, and the stock still below the $100 psychological pivot point. Since November, the political and economic situation in both Venezuela and Argentina has deteriorated (not to mention major currency devaluations), making business even more difficult for MELI. While the stock’s valuation has come down to 35x, future growth prospects have come down quite a bit as well.
Of course, this is well known in the market, as reflected by the increased short interest in the stock, now at multiyear highs, at 28% of the float:
That heavy short base is a potential source of future demand. However, MELI has no major catalyst until its earnings report in early May, and Venezuela and Argentina have not quite stabilized. As a result, I view MELI as rangebound at best for now, with risks still skewed to the downside.