TIP859: Mercado Libre ($MELI): We Doubled Down on Meli w/ Daniel Mahncke & Shawn O'Malley

The portfolio raised Mercado Libre’s intrinsic-value weighting from 5% to 7%, making it the fifth-largest position. The investment case is that its marketplace, payments, credit, logistics and advertising reinforce one another: payment and credit products can help merchants sell more, while marketplace activity supplies data that improves payments and lending. The speakers see more upside than in Amazon, though potentially less safety, and stressed that the long-term case depends on continued growth and management’s ability to balance investment with profitability.

Mercado Pago has grown beyond facilitating marketplace purchases: it processes more payment volume outside the marketplace than within it. In the quarter discussed, Mercado Libre sold about $22 billion of goods while Mercado Pago processed about $101 billion in payments. Mercado Pago had 88 million monthly active users, close to the 89 million people who bought on the marketplace in the last quarter. Fintech contributed 43% of revenue excluding currency effects, grew about 30% annually and outgrew commerce in each of the last three quarters. Customers using both services generate about 70% more GMV than marketplace-only customers and about 90% more payment volume than Mercado Pago-only users; their share of customers has risen 8 percentage points since the end of 2023.

The credit flywheel offers both growth potential and substantial risk. Mercado Libre uses sellers’ sales, seasonality and shipping data to underwrite working-capital loans, and future platform sales can repay short-term merchant loans. Payment devices and QR codes also reveal daily revenue from merchants who may never sell on the marketplace. The credit portfolio reached $16.5 billion at the end of June, up 75% year over year after $2.1 billion of new lending in the second quarter. Nearly half the book is credit cards, with roughly 2.5–3 million new cards issued each quarter. Management says card cohorts break even in 12–18 months, but rapid growth brings expected losses forward: the card portfolio’s net interest margin after losses was about -2.5% last quarter, versus roughly break-even a year earlier. Estimates put this year’s card operating loss slightly below $450 million, with break-even by 2028 and about $1.5 billion in annual profit by decade-end, if growth continues.

Credit indicators were mixed. Brazil’s 15–90-day card delinquencies were about 4.5%, near an all-time low, and the ratio across the book fell to about 7% in Q2 from 8% in Q1. However, loans more than 90 days late rose from 17.5% to 18.5%, and the $4.5 billion allowance for credit losses backs a $16.5 billion portfolio. The speakers noted that the growing card book has not been tested by a significant Brazilian recession; household delinquency reached 6% in August, and system-wide delinquency was at its highest level since 2011. One speaker found Mercado Pago’s observable metrics reassuring, while another saw greater risk than the presentation suggested. Both favored reducing risk, even if that means lower margins, to avoid a major credit loss. A private-sector payroll-loan pilot launched in Brazil in July and signed about 5,000 contracts in its first four days.

Shopee is Mercado Libre’s fiercest competitor in Brazil, challenging it in commerce, fintech and lending. Mercado Libre’s Brazilian GMV is about 2.5 times Shopee’s, although Shopee is at parity or slightly ahead in total items sold. Shopee is expanding into higher-priced goods: Shopee Mall more than doubled in the first quarter and reached about 15% of its Brazilian GMV. The speakers expect Latin American e-commerce to grow about 11% annually over the next decade, with online penetration around 14–15%, leaving room for growth, while recognizing that several profitable players can coexist. Mercado Libre’s lower free-shipping threshold and logistics spending are pressuring margins but appear to support conversion and frequency: Brazil conversion rose about 1.1 percentage points and held there for a year, purchase frequency increased around 20%, and Meli+ subscribers grew 72% year over year. Margins fell from 12% to just under 7% even as revenue grew 50% year over year and topped $10 billion in a quarter; loan provisions reduced operating margin by 4 percentage points in Q1 and 2 points in Q2.

The valuation model assumes investment spending scales back within one to three years, lifting operating margins from about 7% to 13–14% by the end of the decade, though management could invest for longer and mature margins remain uncertain. It projects 2026 revenue growth of 45% to more than $40 billion and 2030 earnings per share of about $177, versus roughly $40 currently, with Mercado Pago reaching the scale of commerce by 2030. At a mid-20s earnings multiple and a 10% discount rate, the model estimated fair value near $3,000, or about $2,400 after a 20% margin of safety. The speakers’ confidence also rests on Mercado Libre’s record of operating through left- and right-leaning governments and volatile conditions across Latin America.