Growth or Profit? The Dilemma of 'Latin America's Alibaba' Mercado

The Latin American version of "Alibaba"—Mercado Libre (hereinafter referred to as $Mercadolibre(MELI.US)) released its Q2 2025 financial report after the U.S. stock market closed on August 5th. Although Dolphin Research has not yet fully covered Meli, a brief commentary on this quarter's performance is provided for reference and tracking.

Specifically:

1. Summary in one sentence—Revenue growth without profit growth: This quarter, Meli's performance can be summarized as strong growth on the revenue side, but the accompanying expansion of costs and expenses led to a significant narrowing of profit margins, with final profit release falling short of expectations.

Specifically, this quarter's total revenue (in USD) increased by approximately 34% year-on-year. Although the growth rate slightly slowed down compared to the previous quarter, it still maintained a high growth rate and was about 3% higher than the sell-side expectations.

However, the cost was that operating profit only increased by 14% year-on-year this quarter, significantly lagging behind the revenue growth rate, with operating profit margin narrowing by a full 2.1 percentage points year-on-year. The actual operating profit was about $830 million, more than 5% lower than the sell-side expectations. Despite the impressive growth, it did not bring corresponding incremental profits.

2. Traffic measures lead to gross margin decline and expense expansion: To drive continued high-speed business growth, Meli has recently implemented several traffic measures. These include significantly lowering the free shipping threshold in the Brazilian market for its e-commerce business (from R$79 to R$19) and offering "generous" interest on balances retained in customer accounts for its financial business, along with multiple large-scale promotional activities.

From this quarter's impressive revenue growth, it is evident that the above measures have indeed been effective. However, the subsidy for shipping costs led to a 1 percentage point year-on-year narrowing of the gross margin this quarter, which was significantly below market expectations. At the same time, sales expenses (including bad debt provisions) increased by 50% year-on-year, with actual spending exceeding market expectations by a full $1.2 billion, which also dragged down the overall operating expense ratio by 1.1 percentage points year-on-year.

The narrowing of gross margin and significant growth in expenses together led to the weak profit growth this quarter.

3. E-commerce underlying indicators still show impressive growth: In terms of segment performance, this quarter, the number of active buyers in e-commerce continued to grow by 25% year-on-year to 70.8 million (in line with expectations), combined with a 5% increase in order frequency per user. This quarter, overall GMV in USD terms grew by 20.6% year-on-year, accelerating compared to the previous quarter.

By region, it can be seen that Meli's sales volume growth in the Brazilian and Mexican markets both improved sequentially. According to the company's explanation, the former benefited from the lowered free shipping threshold, while the strong performance in the Mexican market was attributed to improvements in local logistics efficiency and experience. It was disclosed that the self-operated logistics fulfillment rate in this market reached 75% for the first time this quarter.

In terms of absolute growth rate, the Argentine market led significantly, mainly due to the stabilization and recovery of the local macroeconomic growth and a relatively low base.

E-commerce business revenue grew by 29% year-on-year this quarter, with a sequential slowdown of about 3 percentage points, contrary to the trend of accelerated GMV growth. The underlying reason is the narrowing of the year-on-year increase in monetization rate, which was 1.7 percentage points this quarter, lower than the 2.8 percentage points in the previous quarter.

However, it is reassuring that the monetization rate is at least still rising. It was disclosed that the monetization rate for the 3P business was 21.3%, an increase of 60 basis points year-on-year. More advertising monetization and membership income offset the decline in delivery monetization.

4. Financial business growth is even stronger: Compared to the e-commerce business, Meli's financial business indicators showed even stronger growth. First, the number of monthly active users in the financial business grew by 30% year-on-year to 67.6 million, with almost no sequential slowdown, and faster growth than e-commerce users.

For the other two key indicators, the total payment volume of the payment acquiring business grew by 31% year-on-year, also showing almost no signs of slowdown. Moreover, off-platform payment volume grew even faster, reaching 38%, accounting for 63% of the total, with the company's payment ecosystem continuing to expand rapidly outward.

The growth in the credit business was even stronger, with the credit portfolio surging by 91% this quarter, significantly accelerating from 75% in the previous quarter. Among them, the credit card business showed the strongest growth, with a year-on-year increase of over 120%, continuing to increase its share and being the main source of growth.

While the credit business continues to grow rapidly, the NIMAL (net interest margin after loss = interest rate – funding costs - provision) was 23% this quarter, not decreasing but increasing sequentially, about 1 percentage point higher than the market.

Despite the fact that the proportion of credit card business with lower interest margins and high-credit users in the credit structure is increasing, which theoretically would drag down NIMAL, it did not actually decline sequentially. This reflects the stabilization and improvement of Meli's credit business profitability.

However, in terms of credit quality, the proportion of bad debts overdue for more than 90 days increased slightly by 0.5 percentage points to 18.5% sequentially (part of which should be converted from bad debts overdue for 15-90 days), with a slight increase in bad debt risk, but still not very high compared to historical data.

5. Overview of key indicators

Dolphin Research's View:

Overall, the signals reflected in Meli's performance this time are quite clear—To continue promoting the expansion and growth of e-commerce and financial businesses, the company chose to sacrifice certain short- to medium-term profits. By enhancing fulfillment and financial account returns, as well as generous promotional efforts, this quarter's e-commerce and financial businesses maintained impressive growth, generally exceeding sell-side expectations.

Although this led to short- to medium-term gross margin decline, expense expansion, profit margin narrowing, and profit growth lagging behind revenue, in most cases, long-term investments often bring more returns.

However, more specifically, lowering the free shipping threshold in the e-commerce business can be seen as a necessary choice in response to competitors (such as Shopee and Temu). Shopee has also lowered the free shipping threshold in Brazil and is quickly catching up with Meli in terms of fulfillment experience. It cannot be ruled out too early that this progress may lead to the possibility of Meli's e-commerce business profit margins being suppressed in the long term.

In contrast, investments in the financial business are more likely to yield more returns. After all, in underdeveloped regions like Latin America, the financial credit business is still a very early-stage blue ocean market, far from reaching saturation. The inherently "lucrative" nature of the credit business also means that as long as risk control is done well, profitability will not be a major issue.

Since Dolphin Research has not yet completed an in-depth study and coverage of the company, no judgment on the company's investment value will be made this time until a complete and clear understanding is obtained. From a valuation perspective, according to Wall Street's forecast, the company's pre-performance price corresponds to approximately 26x EBITDA in 2026. As a reference, this valuation is about 1.7x that of Amazon's corresponding metric, not very expensive but clearly already includes expectations that the company's subsequent profit growth will significantly outperform Amazon.

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