Kevin Kelleher
Another small but still troubling red flag is in the offering itself: MercadoLibre planned to raise $44.8 million from the offering before expenses, compared with the $231.5 million that will be raised by current stockholders selling their shares. That 5-to-1 ratio is normally reversed in IPOs.
It makes you wonder: Why the rush? If the company's prospects are so good, why not wait until the lockup expires and the company can sell shares in the market at a profit? A prudent investor can only hope this isn't an attempt to cash out before eBay muscles into its market. A bigger red flag is waving above the valuation of the deal. If you conservatively take into account the stock at its $18-a-share pricing, its market cap would be $797 million. That's more than 15 times revenue last year. If 2007 revenue continues to grow at the same rate it did in the first quarter, that's still a future price-to-sales ratio above 10. On an EPS basis, the historical valuation is even more absurd. MercadoLibre posted a profit of $1.1 million last year. So the IPO is valuing the company at 725 times its earnings. The company would need to grow its profit to $8 million this year in order to get its P/E ratio
below 100.
MercadoLibre is a promising company with impressive revenue and
profit growth. It's a leading player in a growing market, and its close
ties to eBay strengthen its position all the more.
But there are warning signs that would-be investors should study
closely if they want to invest in this stock: the looming threat of eBay
as a competitor; the seeming lack of confidence exhibited by the selling
shareholders; and, most ominously, the surreal valuation.
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