Motley Fool: Online shopping in Latin America

MercadoLibre (Nasdaq: MELI) operates the most-visited online marketplace in Latin America, and it has cemented that leadership with adjacent offerings like logistics and digital advertising. The company benefits from the flywheel effect (of small gains boosting momentum) as its popularity with consumers brings more merchants (and inventory) to the marketplace, which naturally boosts buyer engagement, and so on.

MercadoLibre also has a fintech business, Mercado Pago, which operates the third-most-popular digital wallet in Latin America. It’s primed to see rapid growth in the coming years, as internet penetration is rising quickly in the region.

In short, MercadoLibre taps into two enormous markets – commerce and digital payments – and its strong market position in both spaces is powering robust financial results. In its second quarter, revenue surged 56% year over year, with gross merchandise volume growing 26% and total payment volume popping 84% – all on a currency neutral basis.

MercadoLibre’s stock recently traded at a price-to-sales ratio of 4.8, a bargain compared to its five-year average of 13.5. Wall Street is bullish, with its consensus 12-month price target for MercadoLibre reflecting an upside potential of 50% or more. (The Motley Fool owns shares of and has recommended MercadoLibre.)

Ask the Fool

Q. When a stock price drops, where does the money go? – B.T., Rutland, Vermont

A. A stock’s price just reflects the last price someone was willing to pay for it.

Let’s say you own shares of Buzzy’s Broccoli Beer (ticker: BRRRP), and its shares drop by 10% at some point. If you don’t sell the shares, you haven’t actually lost any money, and they might rise in value again tomorrow. But for now, the shares are less valuable, perhaps due to some bad news about Buzzy’s.

Money doesn’t necessarily go anywhere – the stock is simply priced lower, as a collectible object might fall in value.

Q. I’m thinking of investing in a certain company, which seems to be performing well. Its revenue and earnings have been growing at double-digit rates, and it doesn’t have much debt – but its stock has been falling. What’s going on? – S.A., Houston

A. It might just be down because the overall market has slumped. Lots of great stocks have fallen sharply this past year.

But you might have missed something. Perhaps those double-digit growth rates used to be higher, and its growth rates have actually been falling. Were Wall Street analysts expecting higher earnings, and a recent quarterly report disappointed them? Maybe the company’s profit margins are shrinking, or a competitor is taking some of its market share away. Read up on news related to the company, and you might get a better idea of its health and any challenges it’s facing.

Here’s another possibility: Perhaps the stock soared so much recently with enthusiastic investors bidding its price up that it became overvalued, and now it’s falling closer to its intrinsic value.

My dumbest investment

My dumbest investment was buying shares of a stock I’d heard a lot about online. The share price dropped by $30, so I took my loss and sold. It was soon up over $100 per share from where I sold it! – M.M., online

The Fool responds: Consider what would make any company’s shares surge so much, so quickly: It would have been great demand – many people buying shares, so that those selling shares could sell at higher prices. Ideally, the buying would be due to something like the company’s great growth potential, a terrific earnings report or promising news.

With some stocks, though, and likely the one you bought, the volatility is because it’s a “meme stock” – one that tends to move sharply due to online hype in social media forums such as TikTok, Reddit and Twitter. Someone claiming to be making big profits on a certain stock can send others on buying sprees, which in turn pushes up the share price.

If others join in on the hype, the stock can soar more. Of course, this can’t go on forever, and if the frenzy driving the stock up shifts in the opposite direction, that can send shares on a new downward path.

Recent meme stocks have included AMC, GameStop and Bed Bath & Beyond. All have struggled in the past few years – with unprofitability, heavy debt and/or shrinking revenue.