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Mercado Libre Q2, fY2025: growth-oriented changes in Fintech, Advertising and E-commerce Logistics.

August 24, 2025.

A review of the Letter to Shareholders for Q2, FY 2025, ended June 30, 2025, tells of the energetic progress Mercado Libre is making in its businesses.

Mercado Libre is focused on strengthening its competitive advantage of switching costs (value provided to existing customers that makes a switch to another provider uneconomic) and scale (the ability to utilize already existing capital to accomplish incremental sales, requiring relatively low incremental costs). It is doing so by continuing to advance three long term goals of the business, which mutually reinforce these competitive strengths. These goals are to provide the best value for advertisers in branding and search, build the Ecommerce platform of choice, and to become the largest fintech provider in Latin America.

E-commerce Logistics

Value provided to customers in shipping strengthens the switching costs for Mercado Libre’s e-commerce marketplace. Mercado Libre lowered the price threshold for free shipping from Brazilian Rial (R$) R$79 to R$19 (about US$3.5) (meaning the slower, free shipping is now available for items starting at R$19), and reduced shipping costs for sellers for items priced between R$79 and R$200). This lowers the friction to buyers and sellers of lower priced items. This is showing promising results with GMV accelerating in Brazil.

“We are committed to maintaining our competitive advantage in speed as we are convinced that fast delivery will always be in high demand. In fact, we still see solid demand for fast (paid) shipping on purchases below R$79 in Brazil despite the introduction of free (slower) shipping in this price range. “

It is harnessing it’s scale to continue reducing shipping costs and improve shipping times including for the slower free tier of shipping.

“Those opting for free shipping below R$79 are served with a slower, lower cost layer of our network that leverages existing infrastructure. We have operated this layer with limited volume for 18 months and are now scaling rapidly. Over time, we expect unit costs to fall and slow delivery promises to improve as we innovate, deploy technology and drive more volume through the network.

Mercado Libre is strengthening its competitive advantage over potential competitors. Competitors face the initial obstacle of shipping costs. Asian ecommerce companies like Temu, Shopee and AliExpress, already offered free shipping on the lower priced items, a segment where they have been stronger than Mercardo Libre. But Mercado Libre Mercado Libre has built the fastest shipping Network in Latin America. Its low shipping costs are possible because of its scale.

“Free shipping remains one of our most effective tools for bringing offline retail online and extending our position as Latin America’s largest ecommerce platform. For nearly a decade, we have offered free shipping on a large portion of our business, so we know it is a crucial driver of conversion, retention and customer satisfaction. “

Advertising

Mercado Libre’s advertising platform integrated with Google Ad Manager and AdMob. This integration expands it reach beyond Mercado Libre’s ecosystem. Advertisers can now seamlessly manage campaigns that simultaneously target consumers both inside and outside our ecosystem.

Fintech

The number of Mercado Pago monthly active users has doubled over the last two and a half years to reach almost 68 million MAUs in Q2’25, and engagement is growing as well. The relatively high yields on funds held in Mercado Pago savings accounts are key to attracting new users. This strategy has enabled Mercado Pago to build the largest retail money market fund in Argentina. In Brazil, there are about $180B in popular bank savings accounts which pay approximately 65% of benchmark rate, competing with Mercado Pago accounts which pay from 100% to 120% of the benchmark. With Mercado Pago’s competitive savings account yields, the nominal quarter over quarter increase in assets under management (AUM) in Brazil, Mexico and Chile in Q2’25 was the largest ever, with the total more than doubling YoY o $13.8B.

“Mercado Pago’s credit card performed strongly in Q2’25, with the portfolio growing 118% YoY to $4.0bn. The credit card was the primary driver of 91% YoY growth in the total credit portfolio in Q2’25. It now represents 43% of the$9.3bn book, up from 37% in Q2’24. In Brazil, the entire 2023 cohort is now NIMAL positive (NIMAL: Net Interest Margin After Losses), which is consistent with prior cohorts that typically reached this milestone within two years. ” Overall in the various countries the credit portfolio reflects satisfactory risk management.

In the offline Acquiring business, “We continued to gain market share across all major geographies in Q2’25 with Acquiring TPV growth of 53% YoY on an FX-neutral basis. “

Consolidated Financial Results

Net income was negatively affected by a couple of factors.

There was a slight reduction in operating income margin due to added operating expenses from the extension of free shipping . Instead of taking the relevant revenue from providing shipping, the company is applying the incremental shipping costs as an operating expense to its gross profit. In Q2’25, income from operations grew 14% YoY to $825mn while the operating income margin contracted slightly by 2.10% yoy. The reduction in shipping charges was initiated in June, so we might expect further effects from this in the coming quarters.

But this expense is an investment that will result in stronger competitive advantage and increased engagement. Cheaper shipping drives increased engagement with ecommerce, thereby increasing revenue from linked services, including advertising, In the past, reduced shipping costs have been followed by gains in market share.

There was a non-operating expense, which is subtracted from operating income, which resulted in a lower net income. This was the Foreign Exchange (FX) losses of $117mn, which doubled YoY, mainly due to the devaluation of the Argentine Peso by 12% in April. As Mercado Libre sales in Argentina have grown, fluctuations in the Peso value will affect earnings accordingly. In 2023, there was a much larger devaluation of the Argentine peso by 50%. That year, FX losses for Mercado Libre were $239 million.

The Letter to Shareholders also noted that in July, Standard and Poors (S&P) upgraded Mercado Libre to investment grade with a rating of BBB-. Fitch had upgraded it to investment grade last year. Since its creation in 1999, Mercado Libre has been able to continue growing by successfully making investments in frontier markets, while also dealing with deterioration in the financial conditions, of one or another of the countries in which it operates. And that story of successful business decisions in the face of adversity is one of the things that makes Mercado Libre a remarkable company…

Mercado Libre Adapted to Market Challenges, with Fintech Revenue gradually outpacing Ecommerce. Concluding Evaluation.

Concluding Evaluation

While revenue has grown consistently at a high rate, diluted EPS has grown with a bumpier course. With a decrease in 2017, and annual earnings did not exceed the previous level of 2016, until 2022. Over the decade, annual diluted EPS grew from 1.63 in 2014, increasing 12 times to 19.46 in 2023.

Between 2014 and 2023, top line revenue has grown at an average annual rate of increase of 42.4%. GROSS margin was 71.4% in 2014, fluctuated slightly while trending down over time, ending at 49.8% in 2023. Outstanding for an ecommerce business.

The more uneven progression in earnings can be traced to recurrent increases in expenses which are required to build out the business. Periodically, increases in operating expenses are generated by increases in shipping costs, marketing expenses, increased cost of goods sold related to increased sales of MPOS devices, and increasing salaries. Note that total employees grew 22.4 times, from 2,599 in 2014 to 58,313 in 2023.

As earnings grow unevenly, the ROIC is correspondingly of uneven growth. (Remember that Return on Invested Capital has earnings in the numerator, in the form of Net Operating Profit after tax). ROIC recovers as earnings do, in years following periods of increased operating expenses. One of the issues with Mercado Libre, small cap company, growing rapidly in an “emerging market”, is the issue of requiring large increases in operating expenses in order to build out the business, and the lumpiness of earnings this causes.

We can consider the uneven earnings history in the context of the demonstrated history of the company’s ability to build out the business, in spite of challenges, and successfully persist in growing revenues with a fairly consistent gross margin. It is this history that allows us to have faith in an investment in this company. Increased operating costs were necessitated by the need to address challenges in the market: the need to create fintech services including MPOS capability and credit cards, the need to establish efficient logistics and shipping network, the need to market the company in the immature ecommerce market. And these various novel branches of Mercado Libre reinforce the competitive advantages. There, the historically recurrent increases in operating costs are demonstrably part of the company leadership efforts to adapt to the demands of the market in such a way that enhances the competitive ability of the various capabilities of the company. Sounds like our type of investment.

The gross margin is quite satisfactory. This is important because this means the market opportunity is supports the business. Demand for this differentiated product and services enables pricing which supports the operating expenses needed to build out the business.

Balance sheet is adequate, showing that MELI has cash flow adequate to fund the capital expenditure required to build the company. Debt/equity a bit higher than normal for my portfolio at 1.56 but interest coverage is satisfactory at more than 6.

Free cash flow is very consistent, and Free Cash Flow Margin currently over 30%, confirming the ability to meet demands of Capex for the growing company.

Regarding valuation, the Free Cash Flow to Enterprise Value ratio is 15.8, which incredibly enough, is lower than it has been for the past 10 years.

Enough said for this brave little company.

Mercado Libre, a Multinationally Diversified Emerging Market Success Story

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May 10, 2024. Mercado Libre is incorporated in Delaware, USA, and therefore reports its financial statement in accordance with GAAP standards. But substantially all of its revenue, cost of revenue and operating expenses, are generated in the company’s foreign operations. From its inception, Mercado Libre created subsidiaries diverse Latin American countries with quite diverse economies and governments. Revenues were reported by business segments of the major national markets. This underlines the relevance of particular characteristics of national markets to current business results. To my mind, it is striking that Mercado Libre has successfully put together a collection of operations in diverse national regulatory regimes. From the outset, it did the work of becoming a multinational corporation. This gives it a barrier to entry for a potential competitor who would have to negotiate the political and economic issues of diverse LATAM jurisdictions.

One of the risks of investing in “emerging markets” is that the fortunes of a company can be held hostage to political and economic crises which can be more volatile than in more developed nations, which are governed by more established and therefore predictable institutions. Mercado Libre has mitigated this risk by national diversification, as it were.

when one country is beset by a financial or political challenge of the type that seems to recur in LATAM, the effect may be mitigated by the geographic diversification of Mercado Libre operations.

This was in fact a worry that for some time restrained me from investing in this heroic little company. Recent events in Argentina served to give a fuller perspective on this concern. In November 2023, inflation reached approximately 160% in the land of Malbec and Tango, and subsequently reach 277% in Feb 2024. In spite of this Mercado Libre beat earnings estimates in the first 3 quarters of FY 2023. The only reason it missed earnings estimates in Q4 2023 was not related to bad economic news from Argentina. It was because of a tax liability originating from disputed Brazilian taxation authority, which the company took a charge on, reducing earnings for one time. The company showed it can sustain consistent strong growth and profitability overall, company in spite of economic instability in part of its geographic distribution.

In previous years, Venezuela, one of the initial country bases of Mercado Pago, was overtaken by a Socialist regime which in effect criminalized capitalism and subjected participants to confiscatory financial penalties, including suspension of foreign exchange markets. Sadly, Mercado Libre no longer had effective control of the Venezuela business and financial activities. The Venezuela Subsidiary was “deconsolidated” at end of 2017, a loss of $85.8 million being reported under operating expenses, as all Mercado Libre assets in the country were written off. However, the company continued to thrive in saner jurisdictions.

This multinational, multicultural corporation engages the potential of its human capital. Mercado Libre develops and operates most software and technology in-house. Several development centers are maintained, in various countries. Development teams native to the several countries draw form their own diverse national linguistic and cultural insights when developing products for their national market.

Mercado Libre, a multinational emerging market ecommerce and fintech company incorporated in the USA, has successfully navigated the diverse economic and political landscapes of Latin America, mitigating risks through geographic diversification. Despite challenges like Argentina’s soaring inflation and Venezuela’s fall to socialism, the company has shown resilience, maintaining strong growth and profitability. Mercado Libre’s in-house development across multiple countries leverages local insights, creating a barrier to entry for competitors and demonstrating the strength of its multinational, multicultural approach.

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