Greenberg: Warning Bells at MercadoLibre

Editor's Note: This article was originally published at 11:10 a.m. EDT on Real Money on Sept. 12. Sign up for a free trial of Real Money.

If MercadoLibre ( MELI) doesn't ring a bell, that's because you don't live in Latin America, where it's known as the eBay ( EBAY) and Amazon ( AMZN) of such countries as Venezuela, Argentina and Brazil.

Either that, or you haven't been keeping up with the market's highest of highfliers. The 50%-plus rise in MercadoLibre's shares so far this year -- with a 300% gain since the stock's 2007 U.S. initial public offering -- has earned this name a coveted spot on the momentum-stock hit parade, also known as the IBD 50. Adding to the investor enthusiasm: eBay is its largest investor.

But this head's up: Despite what appear to be the steady blockbuster results of an impressive growth company, a few analysts are starting to raise concerns over such things as increased competition (from the likes of Amazon itself) and decelerating revenue in the company's biggest market, Brazil.

Nothing, however, is potentially more worrisome -- yet largely ignored, overlooked or simply talked away -- than the brewing controversy over the way MercadoLibre accounts for currency translation in countries where currencies are collapsing against the U.S. dollar as inflation shoots through the roof.

The company's loudest critic, Mark Roberts, of the venerable independent research firm Off Wall Street, believes MercadoLibre's foreign-exchange accounting is out of step with Generally Accepted Accounting Principles, or GAAP. He believes that, as a result, the company grossly overstates its sales and profits. "The way they do it is totally inflated and exaggerated," he says. "It has no connection with reality. It's all driven by inflation. The more the inflation, the better the results."

At least one informed company insider, CEO Marcos Galperin, doesn't appear to be taking any chances. On Aug. 8 he sold 293,338 shares at $124.26 a share. This was his first sale in well over a year, and it represents 39% of his direct stock holdings.

Insiders sell for all kinds of reasons, and selling in and of itself is not always a red flag. But, according to George Muzea of Muzea Insider Consulting, in the past Galperin has demonstrated an uncanny ability to sell before MercadoLibre's stock has taken a tumble. "He has top-ticked before," Muzea warns. "Be careful."

Each time, the shares have recovered, moving to higher highs. Also, to be fair, Galperin and his wife still own 3.7 million shares through a trust, which ranks them among MercadeoLibre's biggest holders.

But this time the sales are against the backdrop of the plunging currency, relentless inflation and accusations by Off Wall Street that the company's forex accounting leads to artificially propped-up results.

Off Wall Street first started raising red flags over MercadoLibre well over a year ago. Barron's has also raised questions. But it wasn't until a report in May, as Latin American currencies tumbled in the face of hyperinflation, that the research firm started questioning MercadoLibre's forex accounting.

Much of this gets into an arcane corner of accounting, with discussion of such things as parallel markets and the blue-chip swap rate. But, in a nutshell, Roberts believes MercadoLibre's forex translation should be in local currencies (the parallel markets, or blue-chip swap rate, depending on the country), and not what he calls the "fictional" official rate. That official rate, which MercadoLibre uses, is at a considerably higher rate than local currency. Other companies, including Herbalife ( HLF) in Venezuela, use the more conservative approach.

While revenue growth has slowed at MercadoLibre, it remains impressive, with climbs of 26% and 22% in the past two quarters. But much of that growth, Roberts says, has been "driven by inflation, which has been very intense. The more inflation, the better the results."

Roberts believes that, if the accounting had been more conservative, results would have been considerably lower. For example, he estimates that, if the company had properly accounted for foreign exchange in Argentina and Venezuela last quarter, MercadoLibre's revenue would've grown by 11.6%, not 26%. And rather than reporting earnings per share of $0.67, it would have been $0.43.

"Investors are paying for illusory sales and profits," Roberts says.

Analysts are also starting to wonder how results would be if the company accounted for its currency differently. In a question on last quarter's earnings call, Deutsche Bank analyst Ross Sandler noted, "There's been a lot of scrutiny publicly in the press around financial reporting, given hyperinflation in the region." He then wondered how the company's results would have been if MercadoLibre had reporting its growth "under the kind of everyday FX rates," or local currencies, as Roberts has suggested.

Chief Financial Officer Pedro Arnt replied that the company doesn't "have a number here on what the alternative reporting would be, simply because that's an illegal currency rate." He went on to suggest that analysts do their own work, especially in Venezuela, where he said, "It should be fairly easy to back out the numbers." (This is exactly what Roberts has done.)

When I asked it, a spokesperson replied:

"Our reported financial statements are prepared under U.S. GAAP standards, and are reviewed by our local and regional auditors. These financial statements expose our financial results in accordance with the same accounting practices applied by other U.S. GAAP filers who operate subsidiaries in the same countries as us, and are consistent with our previous quarterly financial statements.

"Our reported financial statements for the second quarter of 2013 are a precise accounting exposition of the strong financial results delivered by MercadoLibre, and its subsidiaries. As reported, during the second quarter of 2013, units sold through MercadoLibre grew by 27% versus the prior year, revenues grew by 26% in US dollars, and net income in U.S. dollars grew by 18%, despite currency headwinds in most of our markets."

"Furthermore, we do not comment on conjectural interpretations of our financial results. We are confident that capital markets, the investment community, individual investors and regulators have a solid understanding of our business and its results."

What about Galperin's stock sales? The company did not acknowledge or answer my question -- even after I asked about it again immediately after receiving the above comments.

While the company says it is "confident" investors "have a solid understanding of our business and its results," some analysts appear to disagree.

In a post-earnings note, Sandler of Deutsche Bank -- the analyst who asked how the company's results would be if it accounted for forex differently -- wrote:

"Meli's financials are becoming increasingly opaque given the hyperinflation impact on growth rates."

J.P. Morgan's Marcelo Santos downgraded the stock to Neutral, as well, saying, "We believe current valuation reflects well the balance of substantial growth opportunities in LatAm e-commerce with risks associated to currency devaluation, increase in competition and economic weakness in the region."

Roberts, meanwhile, continues to believe the company's growth is unsustainable. "Like taking drugs, inflation feels really good until it doesn't," he says.

Reality: For investors, this is the ultimate game of stock-market roulette.

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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