The Motley Fool: Wall Street is bullish on Latin American online marketplace

The Motley Fool Take

MercadoLibre operates the most visited online marketplace in Latin America, and it has cemented that leadership with adjacent offerings like logistics and digital advertising. The company benefits from the flywheel effect (of small gains boosting momentum), as its popularity with consumers brings more merchants and inventory to the marketplace, which naturally boosts buyer engagement, and so on.

MercadoLibre also has a fintech business, Mercado Pago, that operates the third-most-popular digital wallet in Latin America. It’s primed to see rapid growth in the coming years, as internet penetration is rising quickly in the region.

In short, MercadoLibre taps into two enormous markets — commerce and digital payments — and its strong market position in both spaces is powering robust financial results. In its second quarter, revenue surged 56% year over year, with gross merchandise volume growing 26% and total payment volume popping 84% — all on a currency neutral basis.

MercadoLibre’s stock recently traded at a price-to-sales ratio of 4.8, a bargain compared with its five-year average of 13.5. Wall Street is bullish, with its consensus 12-month price target for MercadoLibre reflecting an upside potential of 50% or more. (The Motley Fool owns shares of and has recommended MercadoLibre.)

Ask the Fool

From B.T. in Rutland, Vt.: When a stock price drops, where does the money go?

The Fool responds: A stock’s price just reflects the last price someone was willing to pay for it.

Let’s say you own shares of Buzzy’s Broccoli Beer, and its shares drop 10%. If you don’t sell the shares, you haven’t actually lost any money, and they might rise in value again tomorrow. But for now, the shares are less valuable, perhaps due to some bad news about Buzzy’s.

Money doesn’t necessarily go anywhere — the stock is simply priced lower, as a collectible object might fall in value.

From S.A. in Houston: I’m thinking of investing in a company that seems to be performing well. Its revenue and earnings have been growing at double-digit rates, and it doesn’t have much debt — but its stock has been falling. What’s going on?

The Fool responds: It might just be down because the overall market has slumped. Lots of great stocks have fallen sharply this past year.

But you may have missed something. Perhaps those double-digit growth rates used to be higher, and its growth rates have actually been falling. Were Wall Street analysts expecting higher earnings, and a recent quarterly report disappointed them? Maybe the company’s profit margins are shrinking, or a competitor is taking some of its market share away. Read up on news related to the company, and you might get a better idea of its health and any challenges it’s facing.

Here’s another possibility: Perhaps the stock soared so much recently with enthusiastic investors bidding its price up that it became overvalued, and now it’s falling closer to its intrinsic value.

The Fool’s School

Here are some ways to reduce your risks as you go through life managing and investing your money:

Have an emergency fund. A big, unexpected event, such as a job loss or a major necessary car expense, can be disastrous without one. Aim to keep on hand at least three to six months’ worth of all nonnegotiable living expenses.

Carry sufficient insurance. Insurance may be boring and it may be unlikely that you’ll need it, but when you do need it (due to a fire or theft or lawsuit, for example), it can keep you out of financial trouble.

Invest for the long term. If you’re jumping in and out of stocks frequently, you’re not investing — you’re speculating. Buy stocks of great and growing companies and aim to hold for many years, through stock market booms and crashes.

Stick to companies you’ve researched deeply and know well. Seek healthy companies with great growth potential and competitive advantages. Assess each stock’s valuation and favor seemingly undervalued stocks, which should offer less risk of a big loss than exciting highflying stocks.

Avoid easy ways to lose money. These include following “hot” stock tips, investing in penny stocks (those trading for less than about $5 per share), investing with borrowed money, shorting stocks, day trading and dabbling in options, commodities or foreign currencies.

Take the easy road. You can do very well over many years if you just invest in one or more low-fee, broad-market index funds, such as those that track the S&P 500 or the entire stock market. Keep investing over time, too.

Keep learning. The more you know about investing, the fewer mistakes you’re likely to make. Read books about great investors and great companies. Check out books by John Bogle, Peter Lynch and The Motley Fool. Read Warren Buffett’s educational letters to shareholders at berkshirehathaway.com. Hang out on our discussion boards at Discussion.Fool.com, where you can ask — and answer — questions.

My Dumbest Investment

From M.M., online: My dumbest investment was buying shares of a stock I’d heard a lot about online. The share price dropped by $30, so I took my loss and sold. It was soon up over $100 per share from where I sold it!

The Fool responds: Consider what would make any company’s shares surge so much so quickly: It would have been great demand — many people buying shares, so that those selling shares could sell at higher prices. Ideally, the buying would be due to something like the company’s great growth potential, a terrific earnings report or promising news.

With some stocks, though, and likely the one you bought, the volatility is because it’s a “meme stock” — one that tends to move sharply due to online hype in social media forums such as TikTok, Reddit and Twitter. Someone claiming to be making big profits on a certain stock can send others on buying sprees, which in turn pushes up the share price.

If others join in on the hype, the stock can soar more. Of course, this can’t go on forever, and if the frenzy driving the stock up shifts in the opposite direction, that can send shares on a new downward path.

Recent meme stocks have included AMC, GameStop and Bed Bath & Beyond. All have struggled in the past few years — with unprofitability, heavy debt and/or shrinking revenue.

Who am I?

I trace my roots back to 1897, when my founder started a small cider mill that reportedly used apples cultivated by Johnny Appleseed and sold cider and apple butter from a horse-drawn wagon. I introduced ice cream toppings in 1940. My portfolio features more than 40 brands, with my products found in more than 80% of American homes and many restaurants. Today I’m based in Orrville, Ohio, and have a recent market value of $15 billion. I’m a consumer product powerhouse, with brands such as Folgers, Jif, Milk-Bone, Meow Mix, 9Lives, Cafe Bustelo, Sahale Snacks and Uncrustables. Who am I?

Can’t remember last week’s trivia question? Find it here.

Last week’s trivia answer: Xerox

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