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MercadoLibre (NASDAQ:MELI) delivered another round of strong top-line growth, but falling profits again sank the stock.
Shares fell 12% on Thursday as investors have grown impatient with the company's investment cycle, as it spends on lower free shipping thresholds, expanded logistics, and growing its credit business. However, that again led to narrower margins.
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Revenue in the quarter jumped 45% to $10.75 billion, edging out estimates of $10.71 billion. Both core businesses delivered strong growth, with gross merchandise volume up 38% to $23 billion, and total payment volume jumped 53% to $109 billion.
Operating income in the quarter fell from $636 million to $601 million, and the company reported a net income margin of just 4.2%. On a per-share basis, earnings rose from $8.32 to $8.83 as the company benefited from lower tax expense. Still, that was below analyst estimates at $9.27.
MercadoLibre doesn't give guidance, so estimates are a bit of a guessing game, which works against the stock at times like these when it's investing in the business.
The top-line metrics are clearly moving in the right direction, and management said it gained share in its three largest markets, Brazil, Mexico, and Argentina, which should quell concerns about competition from Amazon and Sea Limited's Shopee.
Importantly, the company continued to see engagement strengthening, and it sees a significant opportunity to grow purchase frequency, noting that its buyers make an average of 12 purchases a year, compared to more than 50 for e-commerce shoppers in developed countries. Faster shipping, lowering the free shipping threshold, and expanding its selection are part of its strategy to build a sticky habit and strengthen its competitive advantage, much like Amazon has done in the U.S.
The company is also seeing more customers adopt multiple products, which drive both revenue and margin improvement over the long run. As the business has scaled up, its cost per shipment in Brazil has fallen, down 5% in constant currency over the last year and 14% since the first quarter of 2025, a sign that it's effectively scaling its logistics operations.
Its credit card portfolio has been another source of headwinds on the bottom line, as the company needs to book a provision for expected losses when it issues new cards, even before it's earned any profits. The credit portfolio grew 62% to $18 billion in the quarter, and default and interest metrics remained stable.
Management noted tailwinds picking up with e-commerce penetration in Latin America increasing at its fastest pace since the pandemic, further justifying its investments in grabbing market share.
Finally, the company argued that the structural long-term profit drivers like lower cost per shipment, operating leverage in product development, and profitable growth in its credit business will deliver overall profit growth over time.
With Thursday's decline, MercadoLibre is now trading down 42% from its peak in 2025, and the stock is at its lowest point in more than two years. That certainly makes it look oversold.
The concerns about lower profit margins are reasonable, but any business putting up 45% revenue growth, especially in scalable industries like e-commerce and fintech, should eventually see profit growth. Investors would like some more details about when margin expansion will return, and that uncertainty is reflected in the weak stock performance.
However, MercadoLibre looks about as cheap as it's been right now, and the stock has significant long-term growth potential across several industries. Taking advantage of the sell-off looks like a smart move, even if a recovery could take at least a few quarters.
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Jeremy Bowman has positions in Amazon and MercadoLibre. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.
MercadoLibre's Profits Fall Again. What It Means for Investors was originally published by The Motley Fool
