$MELI Q2 Earnings Preview

by Enis August 7, 2014 12:46 pm • Commentary

Event:  MELI reports its Q2 earnings today after the close.  The options market is implying about a 8.25% one day move, which is above the 4 quarter average of 7% but below the 8 quarter average of 9.5%.

Sentiment:  Wall Street analysts are mixed on MELI, with 6 buys, 4 holds and 5 sells, though the average 12 month price target of $84.65 is actually about 10% below the stock’s current levels.  MELI is currently down 13% year-to-date, and short interest stands at 25% of the float.  The short interest has been near a 5 year high for the past 6 months:

MELI short interest, Courtesy of Bloomberg
MELI short interest, Courtesy of Bloomberg

Sentiment is clearly quite negative on MELI, though the stock has held up well in the past couple of weeks despite the Argentinian default.

Options Open Interest:  Options are quite wide on MELI, and open interest is relatively low on the stock.  The Aug16th 100 and 105 calls are the only two lines with over 2k of open interest among near-term maturities.  The Jan15 110 calls have over 3k of open interest, the most of any single line.

Price Action/Technicals:  This is what I wrote about MELI’s technical situation in a CotD post in late March:

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.

Since then, MELI is in a similar spot, though it did make a low below $80 in mid-May:

MELI daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
MELI daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The stock is wedged between is rising 50 day ma (around $90.50 at the moment), and its falling 200 day ma (around $97.80 at the moment).  In other words, it looks like it’s decision time for MELI.

However, the longer-term weekly chart shows that MELI is basically in the same spot it was 3 years ago:

MELI weekly chart, Courtesy of Bloomberg
MELI weekly chart, Courtesy of Bloomberg

Does not seem like a short-term break in either direction means much on the longer time perspective.

Fundamentals / Valuation:  I actually took an in depth look at MELI’s fundamental situation in a Deep Dive post in November, 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.

Brazil accounts for about 45% of revenues, while Argentina accounts for about 20% and Venezuela accounts for close to 20%.  Given the problems in Argentina and Venezuela, it’s not a surprise that MELI management has indicated much lower sales growth (only 1% year-over-year) and an EPS contraction (of 16%) for 2014.

Analysts have modeled out a bounce back in 2015 and 2016, to annual EPS of $2.80 and $3.48 respectively.  However, MELI is trading at a 33x P/E multiple on 2015’s expected earnings number, which seems especially rich considering the geopolitical concerns and the recent earnings contraction.

Volatility:  Despite the headline-grabbing news in Argentina, MELI stock has been relatively stable in the past few months, which is a big reason why 30 day implied volatility is lower than usual ahead of an earnings event:

MELI 30 day implied volatility, Courtesy of Bloomberg
MELI 30 day implied volatility, Courtesy of Bloomberg

Options traders are not pricing in a lot of volatility following the earnings event, and continue to favor the odds towards rangebound price action in MELI.

Our View:  We originally looked at the story as the stock in the past has been volatile post earnings but the high levels of implied vol the low levels of liquidity and wide bid ask left us more inclined to be short premium.  But without a strong fundamental view and rangebound technicals we are more inclined to see what the company has to say on their call and take another look.  The margin for error in stock like this, with options prices where they is a bit to thin without strong conviction.