MercadoLibre's Next Earnings Report Could Send the Stock Soaring

MercadoLibre (NASDAQ:MELI) will report third-quarter earnings on Wednesday at a trying time for the stock.

Shares sold off sharply last week as part of a broader rout in Brazilian stocks after Luiz Inácio Lula da Silva won reelection as Brazil's president, contradicting expectations. MercadoLibre is now down 16% year-to-date as profits have fallen due to rising competition and investments in the business.

Will MercadoLibre rise or fall after its earnings report Wednesday afternoon? Let's take a look at what to expect.

Image source: MercadoLibre.

What to expect when MercadoLibre reports

MercadoLibre doesn't provide guidance, which tends to make quarterly reports more volatile, so investors should expect significant movement in the stock after the report, as they have less of a gauge to measure the results.

The analyst consensus calls for revenue to grow 44.6% to $10.7 billion and for earnings per share to increase from $8.32 to $9.27, showing that margins are still expected to narrow.

Investors will be closely watching operating margin as the market is wary of the impact of MercadoLibre's investment cycle. The company is investing in logistics operations after lowering its free shipping threshold in order to remain competitive as entrants like Amazon and Sea Limited's Shopee try to gain market share. Additionally, the company is investing in its credit card business, which has weighed on margins, as the expansion entails upfront marketing and onboarding costs, as well as an accounting adjustment for expected future credit losses, even though no revenue has been collected.

In the third quarter, we're likely to hear something similar about this investment strategy as we did in Q2 when management said its credit book "continues to be very profitable," and added, "It's this overall strength, strong cash generation, robust profitability, and a healthy balance sheet that give us the confidence to keep investing at the pace we are."

Why MercadoLibre stock could jump after the Q3 report

After falling 16% so far this year, there's a good argument that the stock is a bargain. It's recouped some of its losses from the post-election sell-off, but even that decline seemed unreasonable, as the company has done just fine with Lula in charge, putting together an unmatched streak of 30 straight quarters of 30% or better revenue growth.

Meanwhile, MercadoLibre should also benefit from the broader concerns in the market about AI stocks, as it offers the opportunity to invest in a tech-forward growth stock that's not directly exposed to AI.

Finally, the company's investments have a track record of paying off, which is why it's been able to grow revenue by 30% or better every quarter for 30 quarters. MercadoLibre is expanding into new markets in Latin America, growing its credit business, and its core e-commerce and fintech businesses continue to deliver strong results.

It's not fully clear when the margin turnaround will come, and investors may have to wait until 2027.

At this point, MercadoLibre is well into the "buy" range, and if a sell-off results as investors are still frustrated with the lack of margin improvement, that's an opportunity for long-term investors to scoop up shares at a discount.

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