3 Reasons to Fold MercadoLibre Stock Post Third Quarter Earnings Miss

Core Insights - MercadoLibre's (MELI) third-quarter 2025 earnings showed strong revenue growth but missed earnings expectations, indicating underlying issues despite a 39.5% year-over-year revenue increase to $7.41 billion, surpassing estimates by 2.15% [1] - Earnings per share of $8.32 fell short of consensus by 11.77%, highlighting concerns over profitability amid competitive pressures and margin erosion [1][9] Revenue and Growth - Revenue surged 39.5% year over year to $7.41 billion, driven by aggressive scaling in commerce and fintech [1][2] - Operating income increased by 30% year over year to $724 million, but operating margin decreased to 9.8% from 10.5% in the previous year [2] Margin and Cost Pressures - Brazil's reduction of the free-shipping threshold from R$79 to R$19 led to a 42% increase in items sold and a 34% rise in gross merchandise volume, but also inflated fulfillment and logistics costs, resulting in a decline in Brazil's direct contribution margin [3] - Gross margin contracted to 49% from 52% year over year due to higher shipping subsidies and increased infrastructure costs [3] Regional Challenges - In Argentina, revenue growth of 39.5% in U.S. dollars masked a 97% increase in local currency, primarily driven by inflation rather than real consumption [4] - Peso depreciation and rising funding costs negatively impacted profitability, with foreign-exchange losses more than doubling from the previous year [4] Competitive Landscape - Amazon's expansion in Brazil and Mexico poses a significant threat to MELI's logistics advantage, as it can sustain free-shipping incentives longer and at a lower cost [6] - Nubank is emerging as a major competitor in fintech, eroding MELI's dominance in digital payments and consumer credit, with over 100 million users and a low-cost model [7] - Sea Limited's Shopee is increasing pressure on MELI's marketplace through aggressive discounts and subsidies, impacting MELI's take rates [8] Valuation and Market Performance - MELI's stock has risen 35.6% year-to-date, outpacing industry averages, but this growth may not be sustainable without improvements in profitability [10] - Trading at a price-to-earnings ratio of 38.44X, MELI is at a premium compared to industry and sector averages, which may be difficult to justify given ongoing margin compression [12] Conclusion - Despite being a regional leader, MELI's third-quarter results reveal a growing gap between growth and profitability, with compressing margins and increasing competition [14] - The stock's premium valuation and recent performance suggest that current optimism may not align with underlying fundamentals, indicating potential downside risks [14]