Brazil Stocks Plunged. Should You Buy the Dip in MercadoLibre?

Investors were anticipating a victory from the business-friendly candidate Flavio Balsonaro in the presidential election in Brazil over the weekend, but that didn't happen.

Instead, Luiz Inacio Lula da Silva held on to victory and will remain as president.

Brazilian stocks had one of their worst days on record on Monday in response to the news. The iShares MSCI Brazil ETF (NYSE: EWZ) tumbled 19.8% on Monday after trading down more than 25% in morning trading. Some of the fund's biggest holdings include Vale, the global mining company; the fintech company Nu Holdings; and Petrobras, Brazil's oil company.

One of the top stocks out of Brazil is MercadoLibre (Nasdaq: MELI), an e-commerce company that has grown over the years to include a fintech platform, a delivery arm, and a credit business.

MercadoLibre finished Monday down 7.8% after trading down as much as 12.4% earlier in the session. MercadoLibre outperformed Brazilian stocks more broadly, but that makes sense since only about half of the company's business comes from Brazil. Its next two biggest markets are Mexico and Argentina, and the company is expanding across Latin America.

Should investors buy the dip on MercadoLibre? Let's take a closer look.

Image source: MercadoLibre.

Does the sell-off make sense?

It's not unusual for elections to move stock markets, especially when the results are a surprise. However, what is unusual about the fallout from the Brazilian election is that Lula is the incumbent, and his policies would essentially be the status quo.

Bolsonaro had promised fiscal reform, including spending caps, cuts to public spending, and a pledge against new taxes. Whether that would have benefited the Brazilian economy and the stock market, we'll never know.

However, investors who think that Lula's policies have been a problem for MercadoLibre might want to think again. MercadoLibre just became the first company to record 30 straight quarters of 30% or better revenue growth, a testament to its consistency and excellence. It's true that the stock has struggled over the last couple of years, but that is more due to rising competition from the likes of Amazon and Sea Limited's Shopee, and falling profit margins as the company invests in the business.

Is MercadoLibre a buy?

MercadoLibre stock fell to its lowest point in roughly five months on Monday, and the stock is down 36% from its peak last year. On a valuation basis, MercadoLibre looks reasonably priced at a forward P/E of around 30.

A closer look at MercadoLibre's number makes that price look like a bargain.

Revenue in the second quarter jumped 50% to $10.2 billion, and it delivered strong growth in both e-commerce and fintech with gross merchandise volume of $21.9 billion, up 44%, and total payment volume of $101 billion, up 56%.

Those growth rates clearly show that MercadoLibre continues to execute on the bottom line, despite the concerns about falling profits. Operating income in the quarter fell from $825 million to $683 million, though the company's investments in areas like faster delivery and lower free delivery thresholds to make it more competitive seem to be paying off. In the second quarter, the number of items sold per unique buyer reached 8.9, up from 7.8 in the quarter a year ago and 7.4 the year before that.

It's also growing its credit business rapidly, with assets under management per monthly active user reaching $264, up from $204 a year ago.

Analysts are expecting margins to start expanding again next year as the recent investment cycle pays off. Investors would be wise to take advantage of the election-related sell-off and scoop up some MercadoLibre stock while it's trading at a discount.

Jeremy Bowman has positions in Amazon and MercadoLibre. The Motley Fool has positions in and recommends Amazon, MercadoLibre, Nu Holdings, and Sea Limited. The Motley Fool has a disclosure policy.