Analyst Note| Sean Dunlop |
Wide-moat MercadoLibre saw its shares drop 6%-7% in morning trading on Tuesday, Nov. 16 as the company announced the pricing of a 1 million share equity issuance (at $1,550 per share). We suspect that investors have responded adversely due to pecking order theory--with equity issuance often considered a signal that management views shares as overvalued (priced shares will be issued at a 5% discount, which isn't uncommon for shelf registrations). We take a slightly different view, surmising that management is moving proactively to shore up accounts amid an uncertain macroeconomic backdrop in Latin America, with concerns about upcoming elections, constitutional referendums, and fiscal discipline starting to simmer across the region. We encourage investors to look at the firm's track record before considering such behavior aberrant; MercadoLibre has issued shares in each of the last four years, a pattern that isn't uncommon among younger, high-growth companies. Despite the modest (2%) dilutive effect, we expect to maintain our fair value estimate of $1,760 per share and don't mind the modest cushion that cash on hand will provide, as the firm invests heavily in its fulfillment infrastructure, scales its grocery partnerships, and continues to add financial services functionality.