Mercado Libre has already risen 44% so far in 2023: will it rise more?

I want to start by showing the graph of its actions:

MercadoLibre shares are still 38% below their 2021 highs, but have made a strong recovery from the lows. On the chart, in addition to the price, there are two lines: the blue (50-day moving average) and the orange (200-day moving average).

Did the trend change? The quick answer is yes, as a “Golden Cross” has occurred. What is this? It is basically a pattern that occurs when the 50-day moving average (blue line) exceeds the 200-day moving average (orange line). The short term price is higher than the long term price. This indicates a potential change in the direction of the trend, and it is for this reason that it is considered a bullish sign.

Does this mean that MercadoLibre’s shares will or will rise through the “Golden Cross”? No. A trend simply guides us towards the future about what can happen. It is only a probabilistic indication, so there are no certainties.

Is MELI cheap?

When you look at a stock, you can’t just go by price. What you have to understand is its valuation. A simple metric is to use the Price-to-sales ratio, which reflects how much the stock is worth in relation to the company’s sales.

Let’s look at this historical ratio:

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MercadoLibre’s shares exceeded USD 2,000 at the beginning of 2021, marking their all-time high. Was it a good idea to buy his shares at that time? From a trend point of view, yes, since it was clearly bullish. For this reason, in the very short term, it made sense.

But if you’re looking for a longer-term investment, you have to understand what you’re paying for. And buying MercadoLibre shares at USD 2,000 meant having validated a simply crazy valuation. Its shares at the time were worth 26 times its annual sales, an untenable figure. This occurred in full market euphoria, motivated by interest rates on the floor.

The context changed, inflation in the US was record high and the Federal Reserve had to raise interest rates like never before in its history. This hit all stocks, especially tech ones. MercadoLibre was not exempt and fell 70% from its highs.

Observing the ratio price-to-sales, a few months ago it came to have a valuation of 4 times its sales. Was it cheap? Yes, it was quite a record, only comparable to the 2008 crisis.

And now? Have a price-to-sales of 6, which is still well below its historical average. If the growth that the company expects is met, its shares have a long way to go, taking into account the current valuation.

Inflation in the US is falling and it seems to be the gasoline that explains the good climate on Wall Street during the beginning of the year. Although it is worth clarifying that inflation is still high and it is not to claim victory.

For this reason, MercadoLibre shares are still risky, since the economic context has not been resolved at all and there is a lot of uncertainty, especially due to a possible recession.

In addition, this Wednesday, February 1, the Federal Reserve will meet to define the rate hike, a piece of information highly anticipated by the market. And the most important thing will be the tone of the speech, to understand if they will have a more restrictive position (bad for the market) or more lax (good for the market).

For now, the shares of MercadoLibre gave a good signal from the technical point of view (Golden Cross), although it has some associated risks. Therefore, be careful and always use stop lossIn case things don’t go as planned.

Finally, if you are interested in knowing what can happen to the dollar in Argentina during 2023, I invite you to download a 100% free report that I prepared where I analyze all the possible scenarios and how to be prepared. Download it here: https://informes.cartafinanciera.com/

Note: The material contained in this note should in no way be construed as investment advice or a recommendation to buy or sell any particular asset. This content is for educational purposes only and represents the author’s opinion only. In all cases it is advisable to consult a professional before investing.

CEO of Financial Charter