MercadoLibre

MercadoLibre reported another mixed quarter, as its aggressive investment strategy is driving accelerated revenue growth at the cost of margins. Net revenue increased an impressive 50%, or 43% on a constant-currency basis, while net income declined 11% to $466 million in the second quarter.

Why it matters: Similar to last quarter, the market is focusing on the year-over-year decrease in net income, with the shares trading a mid-single-digit percentage lower in after-hours trading on Aug. 5. We are significantly less concerned than the market about the margin compression MercadoLibre is seeing in 2026. We continue to place more value on the firm's long-term strategic growth initiatives than short-term margin pressure. MercadoLibre's investments in fulfillment, first-party sales, and its credit card business are driving rapid user growth and deeper engagement per user as Latin American commerce becomes increasingly digital. The number of active buyers on the platform rose 26% from last year to 89.3 million while the average number of items sold per buyer increased 14%.

The bottom line: We expect to increase our $2,150 fair value estimate for wide-moat-rated MercadoLibre by a mid-single-digit percentage. We see the shares as undervalued, as we think the market is focusing too much on short-term earnings pressure and overlooking the significant growth potential still ahead for the company. MercadoLibre is both a major driver and the primary beneficiary of increasing adoption of e-commerce and digital banking services in Latin America. Given the scale of the growth opportunity, we think it would be a mistake for the firm not to maintain its aggressive investment strategy. Higher credit provisioning has been a major source of margin pressure in 2026, but we would attribute this primarily to accelerated loan growth, not credit deterioration. The firm's loan book increased a blistering 75% during the quarter, requiring a hefty increase in credit reserves.

Growth in MercadoLibre's financial technology segment outpaced its commerce business, with revenue rising 47% on a constant-currency basis. Rapid growth was due to broad strength across the segment, with the firm enjoying the previously mentioned rapid loan growth and continued momentum in its payment business. Monthly active users rose 30% from last year to 88 million, helping drive a 56% increase in total payment volume to $101 billion.

Digging deeper into the firm's lending business, while loan growth was strong across the board, it was strongest in the credit card business. Credit card receivables rose 92% from last year and now make up 47% of MercadoLibre's total loans. This helped contribute to the firm's margin woes, as its credit cards have lower returns than the rest of its loan book. On a more positive note, credit quality remains stable, with the firm's more than 15-day nonperforming loans effectively unchanged from last year.

We are reducing our fair value estimate for MercadoLibre to $2,130 from $2,250. Around $80 of the decrease comes from a reduction in our long-term growth assumptions. The rest of the decrease comes from an increase in the weighted average cost of capital in our model to 11.9% from 11.7% previously, partially offset by the time value of money since our last update. Our fair value estimate translates to a 2026 price/earnings ratio of 58.45 times, though we note that we expect 2026 earnings to be depressed by margin pressure. Our fair value estimate is sensitive to projections for GMV, take rate, payment market share, and loan growth.

Considering these drivers, we expect GMV to increase at a healthy 15.2% CAGR from 2025 to 2035, as MercadoLibre benefits from both a higher e-commerce market share and a higher cost of capital, and continues to benefit from secular trends toward online shopping and away from brick-and-mortar stores. That said, this marks a deceleration from the impressive 23% average rate MercadoLibre has enjoyed over the last four years, as the firm’s increased scale makes such rapid growth more challenging to achieve.

Sticking with the commerce business, we expect the firm’s take rate—or commerce revenue as a percentage of GMV—to continue to improve. MercadoLibre has had significant success in turning its logistics investments into higher fulfillment penetration among its merchant users. This has kept commerce revenue growing faster than GMV, which we expect to continue. 2025 was an unusually weak year for take rate expansion, with the firm’s take rate only rising from 20.4% to 20.7%. However, we would attribute some of this to the firm lowering the threshold for free shipping in Brazil, with the company still seeing take rate expansion in Argentina and Mexico. This was done to drive additional growth, a decision that makes sense to us, but it did create headwinds for the firm’s take rate in the country. Absent similar steps, we expect MercadoLibre’s take rate to climb over time, reaching 26.1% by 2035 on a consolidated basis. In the long term, we expect take rate expansion to come disproportionately from Argentina and its long tail of smaller markets.

We also expect strong growth in the firm’s fintech segment. We project that total payment volume will increase at an average rate of 13.5% over the next 10 years, primarily due to higher market share gains. This is a notable deceleration from the growth rates MercadoLibre has been able to achieve over the last few years, but the payment ecosystem in Latin America has been volatile in recent years, particularly in Brazil due to the success of the government-run Pix payment system, causing us to lean toward conservatism.

Turning to the firm’s credit revenue, we expect strong loan growth to be partially offset by declining gross yields, resulting in interest income increasing at an average rate of 18.6% from 2025-35. As the consumer and small-business lending markets in Latin America mature, we expect the very high interest rates seen in the region to converge toward levels observed in more developed lending markets. We expect this trend, along with a mix shift toward more asset-backed lending, to cause MercadoLibre’s gross yield to fall from 61.4% in 2025 to 40.4% by 2035.

As MercadoLibre exits its high-growth phase, we expect the firm’s operating margin to expand as it benefits from fixed-cost leverage and reduces the cadence of its investments. These margin tailwinds should be partially offset by higher penetration from its first-party sales, which we expect to remain a lower-margin business for the firm. As a result, we expect the firm’s gross margin to fall to 41.3% by 2035 from 44.5% in 2025, while its operating margin is expected to rise to 16.6% from 11.1% over the same period.

In our view, MercadoLibre has a wide Morningstar Economic Moat Rating. We believe that despite the competitive nature of the e-commerce industry, MercadoLibre has built deep competitive barriers that will drive returns on invested capital well above its cost of capital, particularly as the firm continues to gain market share. At its core, MercadoLibre's e-commerce business operates as a two-sided marketplace, connecting buyers and sellers on its platform. Over time, the company has expanded into adjacent services for sellers, including fulfillment, advertising, financing, and customer-facing services, increasing both revenue and its reliance on MercadoLibre. The company’s e-commerce success has also enabled rapid expansion of its Mercado Pago payment platform, entrenching it in Latin America’s payment ecosystem and, with its lending business and data advantage over peers, extending credit to borrowers with limited or no access to financing.

MercadoLibre’s primary moat derives from network effects, which support both its marketplace and payment platforms. In commerce, the value of an e-commerce platform to merchants comes from the volume of potential demand, which is closely tied to the number of shoppers who use it. The value to consumers comes from the breadth of product selection and competitive prices offered by merchants. As a result, the network grows more valuable for merchants as more customers join the platform, and more valuable to customers as more merchants do, creating a self-reinforcing feedback loop. With over 120 million active buyers (around 20% of Latin Americans) and over 1 million active sellers, we believe that MercadoLibre has already created a massive network of buyers and sellers that would be difficult for its competitors to replicate.

Network effects also play a role in the firm’s payments business. Initially just a means of secure payment for MercadoLibre’s marketplace, the company’s Mercado Pago payment platform has evolved to include digital wallets, investment accounts, financing, and payment acceptance. Because of its significant presence in e-commerce, Mercado Pago rapidly gained traction and consumer awareness as a secure online payment method. Consumer trust in the payment option makes it more attractive for online merchants to use for their own websites, while wider adoption among merchants further increases consumer trust and use. This cemented the firm’s position in online payments and established a beachhead for expansion into offline payments and other consumer services, such as digital wallets and credit cards. Additionally, the firm’s role on both sides of a transaction gives it a material advantage in detecting fraud, a significant consideration in online payments. This further reinforces the firm’s disproportionately strong position in digital payment acceptance, with 37% of its acquiring volume coming from online payments, far higher than the industrywide average.

The benefits of MercadoLibre’s network effects are deeply interwoven with the switching costs it has built into its business and its intangible data assets, both of which have supported increasing monetization of its e-commerce platform through higher penetration of fulfillment services and more advertising revenue. E-commerce marketplaces face an inherent risk that their merchant users will multi-list their products across multiple platforms and that shoppers will aggressively compare prices between services. Wide-moat operators in this industry prevent this by tying down merchants through ancillary services, most notably through warehousing inventory, managing order fulfillment, and working capital financing. These services drive faster shipping and better inventory management for merchants, but also increase their reliance on MercadoLibre.

Efforts to increase the firm’s fulfillment penetration have been highly successful, with it rising from the low 30% range in 2020 to over 50% now, with the firm’s Mexican and Brazilian businesses exceeding 75% and 60% penetration, respectively. This creates substantial switching costs as an increasing number of merchants have their inventory and logistics tied to MercadoLibre, with customers now expecting rapid shipping at low prices that generally is not available from third-party providers. Combined with the firm’s advertising, financing, and customer-facing services, switching away from MercadoLibre could require a merchant to completely restructure their business.

MercadoLibre benefits from significant intangible assets due to the sheer volume of transactions, search, and logistics data generated on both its commerce and payment platforms. In its lending business, the company uses transaction and inventory data to help underwrite its consumer and small-business loans. This data gives MercadoLibre an underwriting advantage against other lenders, particularly for borrowers with limited credit data. Because of limited access to consumer and small-business credit in Latin America, MercadoLibre has been able to rapidly gain market share, making lending a major source of revenue for the firm. The lending business also gives merchants an additional incentive to focus their businesses around MercadoLibre, since their sales, inventory, and customer satisfaction data can give them better access to credit. With around a third of active sellers receiving financing from MercadoLibre, this creates a significant layer of switching costs that keeps merchants from multi-listing their products.

Ultimately, MercadoLibre has created a powerful flywheel that pushes both merchants and users to make the company an integral part of their retail, payment, and financing activities. This has allowed the company to rapidly gain market share across all three parts of its business, as its network effects, switching costs, and intangible assets give it a leadership position in Latin American e-commerce and drive competitive strength in payments and lending.

Underdeveloped consumer finance markets in Latin America could be an opportunity for MercadoLibre to expand its credit revenue faster than expected.

The payment ecosystem in Brazil is in a period of disruption as incumbent payment processors lose market share. MercadoLibre’s strength in online payments could drive more market share than anticipated.

Rising e-commerce penetration could allow MercadoLibre’s e-commerce platform to continue to take market share from offline shopping.

Increasing competition among fintech lenders could lead to a sudden deceleration in credit revenue growth or a deterioration in credit quality if consumers and small businesses become overextended.

Competition from large global firms could intensify, leading to lower growth.

Economic conditions in Latin America could deteriorate, leading to major headwinds for MercadoLibre’s gross merchandise volume.