MercadoLibre is the Latin American eBay

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MercadoLibre Inc. (MELI) hosts an online commerce platform throughout Latin America similar to that of eBay.  So similar in fact that it is commonly referred to as the “Latin American eBay” (EBAY)  The company offers two primary platforms to its customers, the MercadoLibre marketplace and MercadoPago online payments solution (think PayPal).

MELI is a relatively small company, currently weighing in at $2.2 billion, and many on the Street point to eBay’s market cap of $34 billion when trying to emphasize the significance of this young company’s potential.  Analysts are forecasting EPS growth of 40% for 2010 and 36% for 2011, but MELI will likely have to top even those lofty numbers if it’s going to maintain its sky high 67.5X multiple.  MELI is set to report Q4 earnings on May 6th, and analysts are expecting 50% year-over-year gains.

MELI last reported earnings on February 22nd, and as you can see on the chart above, shares gapped down on big volume the next day.  Though the company beat estimates by 31%, they came in a bit light on revenue, sparking the selloff.  What the Street didn’t seem to immediately realize was that the revenue number had been impacted negatively by a Venezuelan currency devaluation, and not by the company’s actual operations.  After this sank in, shares began to rally, filling the earnings gap over the next four days.

Since then shares have formed a cup-with-handle base, one of the most common and most favored patterns in the annals of technical analysis.  Here, we saw a handle begin forming on 3/15 and a breakout on 4/1.  Shares retraced back through the breakout point before finally breaking upward again, this time on big volume, on 4/12.  Due to the weakness in the general market, I’m looking for MELI to test its $48.91 buy-point ($0.10 above the high-bar in the pattern) again before its earnings release.  So, my recommendation is to wait for shares to push below $48.91, which I expect to occur some time this week (4/19-4/23), and then open up a partial position on the next breakout.  Buy half your total anticipated position at most.  Then, wait for the earnings release.  If the Q is a blowout, buy the second half of your position.  If shares fall 8% or more, sell your shares and live to fight another day.

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