After declining 43.6 percent from Oct. 21, 2013 to May 20, MercadoLibre (MELI), which means “free market” in Spanish, appears poised to move substantially higher during the months ahead. In addition to building a classic “cup-and-handle” formation, the company’s earnings rose sharply during the first quarter of this year.

Before discussing those factors in more detail, let’s review the company’s operations.

MercadoLibre, which is South America’s version of eBay, operates the largest e-commerce platform in Latin America at www.mercadolibre.com. The Buenos Aires, Argentina-based company is the market leader in online commerce in Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, Uruguay and Venezuela, based on unique visitors and page views.

MercadoLibre also operates e-commerce platforms in the Dominican Republic, Panama and Portugal. For the year ended Dec. 31, 2013, MercadoLibre generated approximately 44 percent, 26 percent, and 18 percent of its revenues from online transactions in Brazil, Argentina and Venezuela, respectively. The remainder of its revenues was generated from transactions in Mexico, Portugal and other Latin American countries.

Like U.S.-based e-commerce powerhouse eBay, which holds an 18 percent interest in MercadoLibre, the company’s online platform allows businesses and individuals to list items, and conduct sales and purchases on its web sites, in either a fixed-price or auction-based format. Additionally, through online classified listings, MercadoLibre’s registered users can list and purchase motor vehicles, vessels, aircraft, and real estate.

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Automobiles can be purchased and sold in Colombia, Mexico, Panama, Puerto Rico and Venezuela through the company’s www.tucarro.com and www.autoplaza.com.mx sites, while real estate located in the following countries can be bought and sold through the company’s www.tuinmueble.com and www.homeshop.com.mx sites: the Canary Islands, Colombia, Costa Rica, Mexico, Panama, Venezuela and the United States.

As a further enhancement to the company’s online marketplace, MercadoLibre allows businesses to promote their products and services through its MercadoClics program. That service lets the company’s users place display and/or text advertisements on its web pages to promote their brands and offerings in an automated and cost-efficient manner.

Through the company’s MercadoShops service, users can establish, manage and promote their own online webstores. Users can choose from a basic, free webstore or pay monthly subscriptions for enhanced functionality and added services for their stores.

To enable the company’s customers to transact business in a user-friendly way, MercadoLibre provides an integrated payments application that enables its users to send, receive and finance payments online through its MercadoPago system – the company’s version of PayPal.

MercadoLibre was founded during October 1999 and went public on Aug. 10, 2007.

Revenues, Earnings and Financial Condition

In spite of the worldwide economic downturn that occurred from late 2007 to mid-2009, and the sluggish economic rebound that transpired in most regions of the world over the past few years, MercadoLibre grew its revenues at a fast pace during each of the past six years.

For example, even during the worldwide economic crisis that occurred during 2008, the company grew its income from operating activities by 73 percent, as compared to the prior year, on a 61 percent increase in the company’s revenues.

Since then, MercadoLibre has grown its income from operations at a year-over-year rate in excess of 18 percent during each of the past five years, on annual revenue increases ranging from a low of 25 percent for 2012 to a high of 37.9 percent for 2011.

Although the company’s operating income grew at a slower pace during 2103 than it did during each of the previous five years, that slowdown was the result, primarily, of the company’s decision to make large expenditures on projects that will likely lead to a faster rate of growth over the next couple of years.

For example, MercadoLibre’s expenditures on cloud computing technologies, content distribution networks and other technology projects rose by 43 percent during 2013, as compared to the prior year. Meanwhile, the company’s expenditures on sales and marketing programs, such as radio and television promotions, rose by 26 percent for the year ended Dec. 31, 2013.

As a result of large foreign currency losses that the company incurred during 2013, due to a substantial decline in the Brazilian Real, MercadoLibre’s net income also grew at a slower pace during 2013, rising 16 percent compared to the prior year.

I expect that trend to reverse as a result of several large interest rate increases that Brazil’s central bank implemented over the past 13 months. As of July 23, 2014, those rate hikes had already resulted in the Real rising by 7.5 percent versus the U.S. dollar over the past six months.

Due to the growing popularity of MercadoLibre, the company’s number of registered users and the number of items sold on its web sites continued to rise at a fast pace during 2013.

Specifically, the company’s number of registered users rose by 22.1 percent for the year ended Dec. 31, 2013, as compared to the prior year, to 99.5 million users. During that same period, the number of items sold on MercadoLibre’s web sites rose by 23.1 percent to 83 million items.

The following factors suggest that MercadoLibre will to continue to grow its revenues, number of registered users and number of items sold on its web sites at a fast pace:

• The company provides persons who purchase products on its sites with access to a broader and more affordable variety of products and services than are available on other online and offline venues.
• The company allows persons who sell items on its sites to reach a larger and more geographically diverse user-base, at a lower overall cost and investment, than offline venues.
• The company plans to offer several new categories of products and services during the years ahead, and to provide those offerings to an increasing number of countries around the globe.

In light of the factors mentioned above, and the company’s recent investments in technologies that facilitate e-commerce and improves its users’ online experience, the outlook for MercadoLibre and its stock appears to be very favorable.

The fact that the company markets its e-commerce sites primarily to persons who speak Spanish and Portuguese – the second- and sixth-most spoken languages around the globe – also bodes well for the long-term outlook for the company.

And, the company’s strong financial condition places it in a position to withstand any downturns in Latin American economies, with its cash and short-term investments in marketable securities covering 90 percent of the company’s total financial obligations as of March 31, 2014 and its long-term debt accounting for only 3.2 percent of the company’s total tangible assets.

Valuation and Recent Trading Action

In spite of the favorable growth prospects mentioned above, MercadoLibre’s stock appears to be reasonably priced, with its stock closing Thursday at $91.76 and a price-to-earnings multiple (P/E ratio) of 30.

My research indicating that the company will grow its net earnings per share at an average annual rate of around 30 percent over the next few years.

Meanwhile, the recent trading action in MELI suggests that the downturn in that stock that occurred from July 7 to July 17 of this year has ended, with price-momentum statistics indicating that MELI fell to a substantial oversold level on July 17.

Even more encouraging from a trading perspective is the fact that MELI built a classic “cup-and-handle” formation from Oct. 28, 2013 to July 17 of this year.

For those of you who aren’t familiar with a “cup-and-handle” formation, that’s a trading pattern that occurs when a stock pulls back considerably from a recent high in response to worsening economic or company-specific developments, then rebounds on favorable developments, and then pulls back modestly, on light trading volume, for a few days or weeks. Visually, that type of trading pattern looks like a cup with a handle.

The cup is in the shape of a "U" and the handle has a slight downward drift. The right-hand side of the pattern tends to be accompanied by low trading volume.

As the stock moves up to its recent high, it will often incur selling pressure by people who bought the stock at or near that high. That selling pressure will often cause the stock to move lower for a few days or weeks as those investors and traders sell the stock. Then, when savvy investors and traders buy the stock, it tends to move substantially higher during a short period of time.

Investment Advice

As a result of the factors and developments mentioned above, and the fact that recent economic statistics for Brazil indicate that economic conditions in that region of the world will improve considerably during the next 6 to 12 months, I advise stock market investors and speculators alike to allocate a portion of their financial market assets to MercadoLibre.

Editor's Note: David and/or his firm, Frazier & Mayer Research, LLC, is recommending for his clients and subscribers to his firm’s investment newsletter to buy MercadoLibre (MELI).

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.