Should You Hold or Fold MercadoLibre Stock at P/E Multiple of 42.7X?

Core Viewpoint - MercadoLibre's (MELI) current P/E ratio of 42.7X indicates a significant premium compared to industry averages, suggesting unrealistic expectations that may threaten long-term sustainability [1][2] Market Performance and Financial Results - MELI's Q2 2025 revenues increased by 34% year-over-year to $6.8 billion, with gross merchandise volume up 21% and total payment volume rising 39% [4] - Operating margin contracted by 210 basis points to 12.2%, and net income margin decreased to 7.7%, indicating pressure from heavy subsidies and promotional spending [4] - Adjusted free cash flow was reported at $454 million, achieved only after $816 million in net fintech funding, highlighting the fragile nature of MELI's growth model [5] Competitive Landscape - Rising competition from Amazon, which is expanding its logistics network in Latin America, poses a significant threat to MELI's fulfillment advantage [6] - Sea Limited's Shopee platform in Brazil is attracting price-sensitive buyers, while eBay is gaining momentum in Latin America's cross-border trade, intensifying pressure on MELI [7][8] Geographic Concentration - MELI's reliance on Brazil, Argentina, and Mexico increases regional risks, with Q2 growth in Brazil achieved by lowering free shipping thresholds [10][11] - Argentina's currency volatility resulted in $117 million in foreign exchange losses, doubling year-over-year, impacting net income [11] - Mexico's fulfillment gains required aggressive financing concessions and deeper price cuts, exposing MELI to potential policy shifts and economic instability [12] Credit Expansion and Financial Stability - MELI's credit portfolio surged by 91% year-over-year to $9.3 billion, with non-performing loans over 90 days remaining elevated at 18.5% [13] - Net interest margin contracted to 23% from 31.1% a year ago, indicating deteriorating returns despite increased exposure [14] - The credit-fueled growth model appears unsustainable in the current volatile Latin American environment [14] Investment Thesis and Recommendation - The Zacks Consensus Estimate for Q3 2025 earnings is $9.88 per share, revised downward by 16.6%, reflecting weakening confidence in MELI's earnings trajectory [15] - MELI shares have declined by 4.6% over the past three months, underperforming the sector and industry growth [16] - The disconnect between expectations and fundamentals reinforces the view that MELI's premium valuation is unjustified at current levels [20]