Opinion on  MercadoLibre Inc. (MELI)
Mercadolibre will double within 12 months

Mercadolibre is the pre-eminent e-commerce company in South America. This is a region with economic strength and a culture closer to that of America or Europe than China. For these reasons online marketplaces like Mercadolibre will gain popularity faster than is expected currently.

Now that I have the weighted-average-shares issue mostly dealt with, I'm going to complete my earnings per share calculation. I'm going to slightly adjust my numbers to be more aggressive here. If this is a mistake we'll see for sure soon enough. Perhaps I'm just too stubborn to allow my numbers to give me zero quarterly sequential growth in earnings for a company that I have a substantial holding in. That's what my prior numbers would've given me. We'll see.

$26.5 Million in revenue

25% operating income margins

$6.625 income

Foreign currency holdings loss estimate: $1,000,000

Other expenses: $1,000,000

Income/Asset tax expense rate from Q3: 33.4%, Q4 with same rate gives $1,544,750

Income after tax: $3,080,250

Preferred stock cost estimate based on rough average: $100,000

Net income: $2,980,250

Taking into account the appreciation of the Brazilian Real (Brazil accounts for roughly 40% of net income), which gained an average of 10% during the quarter from the average of Q3:

$2,980,250(0.40)= $1,192,100

$1,192,100(1.10)= $1,311,310

(0.6)$2,980,250= $1,788,150

$1,311,310 + $1,788,150 = $3,099,460

$3,099,460 / 44,226,567 = $0.07 per share

This is sequential growth rate of 16.67% using the total share count of 44,226,567 retroactively for Q3 (0.06 per share in Q3). This leads to an annual growth rate of 85% going forward (if my numbers are close and if the Q3 to Q4 growth rate is indicative of the company's growth trend). Additionally if you multiply 0.07 by 4 you get a price to earnings ratio of 113 using today's closing price of 31.72 for MELI. Based on this sequential growth rate of 85% (which is sure to change but I think is still worth extrapolating because investors and traders will) I expect earnings of 0.08, 0.095, 0.11, and 0.13 in Qs 1 through 4 and total earnings of 0.415 in 2008. This is substantially below analyst estimates of 0.54. Despite this Mercadolibre is still trading at a P/E of 76 using these lower than expected 2008 earnings. Downside should be limited but with an earnings miss of at least 0.03 compared to analyst estimates of 0.10 and slowing growth and higher costs may still drive the stock lower. I still expect that it will be higher at the end of the year than it is now.

Though these numbers show an EPS of 0.07, it is quite possible that MELI will earn 0.06 (using yesterday's more conservative numbers).

The big questions are why MercadoLibre's revenue growth rate slowed and why margins shrank in Q4 (this is not yet a fact but the company released guidance in January estimating this would be the case.) If there is a good and short-term reason for this shares should ultimately rise following the earnings report and conference call. If there is no good reason and MercadoLibre's growth rate slowing is not a temporary blip and spending growth will continue to trend higher than revenue- shareholders like myself may be in for more punishment. As I said earlier though, I think MELI is cheap even given the worse scenario. It should easily be trading above 40 by mid year.

Disclosure: I own shares in MELI

Growth stocks are cheap. Some examples include Apple trading at 25 times 2008 earnings, Mercadolibre trading at 65 times while growing its bottom line north of 100%, and Baidu trading at 64 times while growing at 80%.

The reason growth stocks are cheap is (obviously because of the risks to growth, which include asset deflation in housing and the raging credit crisis that goes along with it. So what's one way to tell whether the market is thinking (or fearing) that the crisis is going to spread further and cause more bad news? The answer is gold.

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When gold made a double top in late November, Mercadolibre (MELI) began a major run that lasted until late December, which ended when gold broke out of its consolidation and went on to knew highs. Gold looks like it may have made a double top on February 11 ^th the same day that Mercadolibre made a large move up off of its lows.

Gold tends to be bought as a safe-haven, when there is a risk of recession, interest rates are going lower, currencies are weakening, and when the financial system is in turmoil. Mercadolibre is an e-commerce company in central and south America that is very leveraged to economic growth.

Gold is acting as a leading indicator. If gold makes new highs, look for more weakness in growth stocks. If it doesn’t, let the good times roll.

Disclosure: I own shares in Mercadolibre (MELI)