MercadoLibre's Credit Surge Masks Deepening Profitability Woes

What happened

A recent Motley Fool article highlights MercadoLibre's 83% year-over-year growth in its fintech credit portfolio, contrasting it with Amazon's underperformance. However, the DeepValue report reveals that this aggressive credit expansion is occurring amidst significant margin compression and rising credit risks. MercadoLibre's operating margin has fallen from ~14% to ~10%, driven by subsidy wars in Brazil and increased capital intensity. The loan book has surged to $11 billion, but provisions are growing faster, compressing net interest margin after losses to ~21%. This growth-at-all-costs strategy, while boosting top-line metrics, is eroding profitability and increasing the company's vulnerability to a credit downturn.

Implication

The 83% credit portfolio growth underscores MercadoLibre's aggressive fintech push, but it comes with heightened credit risk and funding dependencies. Margins have compressed significantly due to competitive subsidies in Brazil, indicating that growth is being achieved at the expense of profitability. With a P/E of 53x and EV/EBITDA of 37x, the valuation assumes a swift return to higher margins, which seems optimistic given current trends. The DeepValue report flags potential downgrades if EBIT margin stays under 9% or NIMAL drops below 20%, both plausible scenarios. Therefore, investors should consider trimming positions or waiting for a lower entry point until there is clear evidence of margin stabilization and controlled credit expansion.

Thesis delta

The article's focus on MercadoLibre's 83% credit growth reinforces the DeepValue report's warning about escalating financial risks. It does not alter the core thesis but underscores the urgency of monitoring credit quality and margin trends, as continued aggressive expansion without profitability improvements could lead to a sell-off.