MercadoLibre Faces Margin Strain: Should You Hold or Fold the Stock?
The second quarter of 2025 earnings report reveals concerning trends for MercadoLibre, with operating margin contracting 210 basis points year over year to 12.2%. Despite having achieved net revenues of $6.79 billion, representing a 34% year-over-year increase, the company's adjusted EPS of $10.31 missed Zacks Consensus estimates by 14.15%, marking a margin stumble that stems primarily from aggressive investment in free shipping initiatives and heightened marketing expenditures that prioritize market share over near-term profitability.
The Zacks Consensus Estimate for 2025 earnings is pegged at $44.63 per share, which has plunged $3.12 over the past 30 days.
Rapid Expansion Strategy Weighs on Profitability
Meli's strategic decisions have increasingly favored rapid expansion over earnings sustainability, raising questions about capital allocation efficiency. Operating expenses were approximately $2.3 billion, which increased 38.4% year over year, with the figure expanding 110 bps year over year to 33.4% of revenues. The aggressive expansion approach has been particularly evident in Brazil, where MercadoLibre has lowered free shipping thresholds and expanded first-party sales to capture market share. The company has prioritized geographic and operational expansion through costly logistics investments and promotional campaigns, mirroring rapid-growth strategies that have historically pressured near-term profitability for uncertain long-term market dominance.
Competition Has Intensified From Established Players
MercadoLibre has faced mounting competitive pressure across its business segments, which has thus pressurized margins significantly. In fintech, digital banking giant Nubank NU has emerged as a formidable challenger, leveraging AI-driven credit models and low-cost digital banking services to capture market share in payments and lending. In e-commerce, Amazon AMZN has expanded its Brazilian and Mexican operations with enhanced logistics and seller advertising tools, while SEA Limited 's SE Shopee platform has gained traction through mobile-first strategies and competitive advertising rates. This multi-front competitive pressure has forced MELI to maintain elevated marketing spend and defensive pricing strategies across all business lines, creating sustained margin compression.
MELI's Price Performance and Valuation
MELI shares have declined 10% over the past three months, underperforming the Zacks Retail-Wholesale sector and the Zacks Internet-Commerce industry's growth of 4.9% and 6.2%, respectively. Meli's peers Amazon and Sea Limited have increased 9.4% and 6.1% respectively, while NuBank has declined 5.8% in the same period.
Meli's decline over the past three months reflects investor concerns over escalating regional headwinds and potential trade policy changes. Rising political uncertainty across Latin America, persistent currency volatility, particularly in Argentina, and fears of increased tariffs under shifting U.S. trade policies have weighed heavily on sentiment. Additionally, macroeconomic instability in key markets like Brazil and Mexico has raised questions about sustainable growth prospects, prompting investors to de-risk their exposure to Latin American e-commerce despite the company's market leadership position.
MELI Underperforms Sector in 3 Months
Meli currently trades at a significant premium compared to the broader Zacks Internet-Commerce industry and its direct competitors. The company's forward 12-month Price/Earnings ratio stands at 39.84X, substantially higher than the industry average of 24.67X. When benchmarked against key peers, MELI's valuation appears stretched, with Amazon trading at 31.05X, Sea Limited at 34.38X, and Nubank at a more conservative 17.79X.
The Value Score of D further reinforces an unattractive valuation for the stock at the moment.
MELI's P/E F12M Ratio Depicts Premium Valuation
Time to Step Back Before Further Deterioration
For investors, MercadoLibre's current trajectory should serve as a clear warning signal. The company's premium valuation cannot justify the ongoing margin compression amid escalating competitive pressures across all business segments. With persistent regional headwinds, currency volatility and excessive spending on rapid expansion and promotional campaigns showing no signs of abating, the fundamental investment case has deteriorated considerably.
As market reality sets in regarding MELI's vulnerability to both macroeconomic instability and operational challenges, investors would be wise to reassess positions before further disappointments trigger a valuation reset. Investors should consider exiting positions while the Latin American e-commerce growth narrative still provides some support to the stock price rather than waiting for additional evidence of the growing disconnect between MELI's market dominance aspirations and its operational reality. Given these trends, MercadoLibre's Zacks Rank #4 (Sell) appears well-justified.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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