“The Big Short” investor Michael Burry recently made a notable move, buying into Latin American e-commerce giant MercadoLibre.
His purchase came right after the company’s stock plunged nearly 13% in a single day. This might seem strange, as MercadoLibre just reported its fastest sales growth in almost four years. So, why did the stock fall, and why did Burry see this as a buying opportunity?
The answer lies in the classic tension between growth and profitability. MercadoLibre is in a full-scale investment phase. It's pouring money into expanding its logistics network, offering free shipping, and growing its financial services, especially its credit division. While these efforts are successfully attracting more customers and boosting sales, they are also expensive and have been squeezing the company's profit margins. This led to MercadoLibre missing its profit estimates for the fourth consecutive quarter, which spooked short-term investors.
Burry, known for his long-term, deep-value approach, is looking past this temporary pain. First, the market's negative reaction to the profit miss created the entry point. The steep stock drop pushed MercadoLibre's valuation down to a historically low level based on its sales, making it attractive from a price perspective. Second, he sees the current spending not as a problem but as a strategic investment to solidify its dominance. The company is consciously choosing to capture market share now to reap larger profits later. Management has been clear about this strategy for several quarters. Third, external factors are starting to look favorable. A key competitor, Shopee, recently raised its seller fees in Brazil, which eases competitive pressure. Additionally, central banks in its main markets, Brazil and Mexico, have begun to cut high interest rates, which could lower borrowing costs for its credit business in the future.
In essence, Burry is betting that MercadoLibre's aggressive investments will build an unbeatable competitive advantage. He believes the market is overly focused on the short-term margin compression and is ignoring the long-term potential of the “Amazon of Latin America.” He’s buying what he sees as a dominant company at a discounted price, anticipating strong returns over the next 15 years or more.
- P/S Ratio (Price-to-Sales Ratio): A valuation metric that compares a company's stock price to its revenues. A low P/S ratio can indicate that a stock is undervalued.
- Margin Compression: A situation where a company's profit margin (the percentage of revenue it keeps as profit) decreases, often due to rising costs or competitive pressure.
- Selic Rate: The benchmark policy interest rate set by the Central Bank of Brazil, which influences lending rates across the country's economy.