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MercadoLibre Is Well Positioned for Latin America's E-Commerce Boom

But its valuation understates competitive and cyclical pressures.

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With strong brand recognition and well-established operations across all major economies in Latin America,  MercadoLibre (MELI) remains one of our favorite investment ideas to capitalize on the region's e-commerce boom, which has been driven by higher Internet adoption and disposable income. We forecast average annual growth of about 24% for the next decade and modest operating margin expansion following a period of investment in IT infrastructure, marketing, and payroll during the next several years.

Nevertheless, we think the stock--trading 37% above our $65 fair value estimate--overstates these lofty growth expectations, and we would suggest that investors wait for a wider margin of safety. Signs of a global economic slowdown and softening commodities demand are likely to weigh on export-driven Latin American economies and their currencies in the near term, prompting investors to scale back from emerging-market exposure; this could send the stock down in the coming months. Additionally, Amazon (AMZN) and eBay (EBAY) lurk as potential rivals in Latin America.

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Dan Su does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.