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Mercadolibre: Don't Ignore Currency Mess

Dee Gill

Typically, even the whiff of a scandal sends U.S investors fleeing from foreign company shares, particularly if the issue involves suspect accounting. But investor appetite for another Amazon.com (AMZN) can apparently trump such caution.

MELI Chart

NASDAQ:MELI data by YCharts

Shares of Argentine-based Mercadolibre (MELI) are up 23% in the past three months, as seen in a stock chart, and almost double that for the year. Investors like the company because it acts as a combination Amazon, eBay (EBAY) and PayPal in Latin America, with big revenue growth just like those domestic counterparts. Mercadolibre reported revenue growth of 26% last quarter, up from 19% the previous quarter.

MELI Revenue Quarterly YoY Growth Chart

MELI Revenue Quarterly YoY Growth data by YCharts

In recent months, however, a couple of analysts have questioned whether the revenue gains were artificially fueled by funky foreign exchange calculations. Revenue growth was highest in Argentina (66% last quarter) and Venezuela (68%), two countries experiencing rampant inflation and currency devaluation. The company gets about 40% of its revenues from those two countries. The rapid drop in those currencies makes any valuation of revenues from Argentina and Venezuela suspect, and analysts have been debating whether Mercadolibre is using an exchange rate that doesn’t truly reflect what it’s getting.

Mercadolibre publishes its earnings in U.S. dollars using the official, published forex rates for both countries. But government currency controls make changing local cash at official rates all but impossible. In reality, market rates give corporations far fewer dollars for their local currencies than the official exchange rates suggest. Such a technicality, claimed one analyst in July, could have cut the company’s growth rate in half.

Argentina Inflation Chart

Argentina Inflation data by YCharts

Investors have also questioned why CEO Marcos Galperin sold 39% of his direct shares in August. There’s been no official explanation.

Perhaps a bigger worry for MercadoLibre shareholders should be the more routine investing kind. Mercadolibre trades at a forward PE ratio of 47, implying that investors expect huge growth for many years to come. Amazon, however, has only begun to go into Latin America. The threat to Mercadolibre’s growth may be more ordinary than scandalous after all.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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