MercadoLibre stock price has dropped: time to buy the MELI dip?

MercadoLibre stock price has suffered a harsh reversal in the past few weeks as it moved into a technical correction. MELI has fallen by over 13.5% from the year-to-date high of $2,158 as concerns about its credit business slowdown continued. So, is it safe to buy the MELI stock?

MercadoLibre is a dominant player in Latin America

MercadoLibre, a Brazilian company, has become one of the fastest-growing company in Latin America. Its annual revenue has grown from over $2.2 billion in 2019 to over $14.4 billion in the last financial year.

This growth happened as more customers continued signing up to its platform, and as the company added more countries into its ecosystem. In addition to Brazil, the company has become a major player in other countries like Argentina, Columbia, and Mexico.

MercadoLibre has also added more services into its portfolio. For example, it has become a major player in the fintech industry, through Mercado Pago, a solution that lets users save money, take loans, buy insurance, send money, and handle other transactions easily. 

This growth has transformed MercadoLibre into one of the biggest companies in the Latin American region with a market cap of over $96 billion. 

Why MELI stock has retreated

MercadoLibre stock price has retreated after the company published the last financial results.

These numbers showed that its gross merchandise value (GMV) rose by 14% in the third quarter to over $12.9 billion. This growth happened as the company sold 455.9 million items.

Consequently, the net revenue jumped by 35% to $5.3 billion, a figure that was higher than the full amount it sold in 2020. Its net income rose to $397 million, representing a 7.55 margin.

MercadoLibre’s growth was spread across all its division. For example, its fintech business had over 56.2 million monthly active users, a big increase from the 41.5 million who used its service in the same period last year.

Assets under management rose to $7.6 billion, while its credit portfolio rose to $6.06 billion. The later explains why the MELI stock has retreated as the net interest margin after losses continued falling, reaching 24.2% in the last quarter. It had a net interest margin of 39.8% in the same period last year. Therefore, analysts expect that this division will continue slowing in the coming months.

Read more: MercadoLibre stock has surged to a record high: still a buy?

MercadoLibre and its valuation

The other reason why the MercadoLibre stock price has crashed is that investors believe that it is a highly overvalued company. Data shows that it has a forward price-to-earnings ratio of 56.58, much higher than the sector median of 18.

Other popular e-commerce companies have a smaller valuation metric than that. For example, Amazon, the biggest player in the industry, has a forward P/E of 45, while eBay has a multiple of 13.

MELI is also highly valued than other companies that are growing faster than it. For example, NVIDIA, a company that is having double-digit growth rate has a forward P/E ratio of 47. 

Also, the MELI stock has dropped as investors anticipate that the ongoing tightening by Brazil’s central bank will affect demand.

MercadoLibre stock price analysis

MELI stock chart by TradingView

The daily chart shows that the MELI share price formed a double-top pattern at $2,155. This is one of the most popular bearish patterns in the market. 

The stock has moved below the 50-day and 100-day Exponential Moving Averages (EMA). Oscillators like the Relative Strength Index (RSI) and the MACD have all pointed downwards.

Therefore, the stock will likely continue falling as sellers target the key support level at $1,700. This is an important level that connects the lowest swings since January last year. A break below that level will point to more downside.

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