MercadoLibre Pays Up to Win Shoppers’ Loyalty
After the market closed yesterday, MercadoLibre (NASDAQ:MELI) reported third-quarter revenue of $10.75 billion, up 45% from a year ago. Operating income fell 6% to $676 million, and the operating margin shrank to 6.3% from 9.8% a year earlier. The stock fell about 6% in pre-market trading this morning.
Much of that lost profit went to shoppers. For Team Rule Breakers, which has recommended the stock twice in Stock Advisor since 2023, that choice is a direct test of what draws customers to a business and keeps them there.
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The fifth of six Rule Breakers Traits is: Strong Consumer Appeal
Shoppers today face more choices than they can sort through. Brands that let people pick one trusted place to shop and pay can earn deep loyalty, and the best ones build raving fans. That loyalty rarely shows up in financial statements, which is one reason the market can overlook it.
Where the Profit Went
Last year, MercadoLibre lowered the order size needed for free shipping in Brazil. Shoppers responded by buying cheaper items more often. Items sold in Brazil rose 45% in the quarter, but each package now brings in less revenue. The company also grew its warehouse space by almost 20% in a single quarter ahead of the holiday season and spent more on affiliate marketing in Brazil. Management said it gained market share in Brazil, Mexico, and Argentina.
Its fintech business grew quickly, too. Monthly active users rose 29% to 93 million, and the credit portfolio grew 62% to nearly $18 billion. The company sets aside money for expected loan losses as soon as it extends a loan. Interest income arrives later, so fast credit growth tends to weigh on profit today.
When Perks Become Expectations
Once shoppers get used to free shipping, they may resist paying for it again. MercadoLibre could then struggle to restore its margins without losing some of the customers it just won. Rivals such as Amazon (NASDAQ:AMZN) also compete hard in Brazil, which makes pulling back on perks riskier.
The other markets and the lending business carry their own risks. In Mexico, tax changes and weaker spending slowed growth. Late loans held steady in the quarter, but a credit book growing this fast could cause trouble if Latin American borrowers come under strain.
Is the Appeal Worth the Price?
For patient holders, the bet is that today's spending is buying lasting habits. Shoppers who come to rely on fast, free delivery and a trusted place to pay may keep coming back long after the subsidies ease. The company gave no financial guidance, so the timing of any margin recovery is still unclear.
We're giving our own recommendations the same patience. Team Rule Breakers recommended MercadoLibre in Stock Advisor on Sept. 21, 2023, at $1,293.28, and again on Nov. 21, 2024, at $1,968.15. The first is up since then but trails the S&P 500, and the second is below its recommendation price.
We judge a stock over at least three to five years, so neither has had its full run yet. Across Motley Fool services, Team Rule Breakers and Team Hidden Gems have recommended MercadoLibre more than 50 times, and it has never been sold or moved to the Penalty Box.
Investors who believe MercadoLibre is building real loyalty may see this quarter as an opportunity to invest. Anyone less sure might wait for margins to steady.
The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.