MELI MELI's Stock Doubled in Two Years - So Why Did Net Income Just Fall?

A Weaker Quarter, Wrapped in a Much More Expensive Stock

MercadoLibre's second quarter of 2025 is a genuine reversal of the story Q1 2025 told: net revenue still grew a strong 33.8% (52.7% at constant currency) to $6,790 million, but operating margin fell 2.1 percentage points to 12.2% - the first margin decline this coverage has measured after Q1's 0.7-point improvement - and net income actually declined 1.5% YoY, to $523 million from $531 million. Two things did the damage: Brazil's direct contribution margin collapsed 8.7 percentage points to 15.6%, and the consolidated effective tax rate jumped from 20.5% to 27.0% on lower Argentine tax-inflation deductions and rising withholding-tax drag on dividends from subsidiaries. Adjusted EBITDA, which strips out the tax line entirely, still grew a healthy 16.4% to $1,024 million - a reminder that the two numbers can tell different stories in the same quarter, and this quarter they genuinely did.

The market's own read on all this was the opposite of cautious. MELI stock closed the quarter at $2,613.63, up 120.7% over the trailing two years and 34.0% since March 31 alone - meaning the valuation multiple expanded sharply in the exact quarter the underlying business posted its weakest margin and profit reading in this coverage's recent history. Enterprise value rose to roughly $136.3 billion from Q1's $101.7 billion, a jump not remotely explained by this quarter's own operating results.

The Prescription

MercadoLibre should treat Brazil's margin compression as the single most important operating question to answer next quarter, not a one-off. Brazil is still 51.2% of consolidated revenue, and an 8.7-point direct contribution margin swing in the country carrying half the business is large enough that management should disaggregate exactly how much of it is deliberate (funding the logistics build-out, absorbing more shipping as principal rather than agent) versus how much is credit-cost drag from the fintech book scaling inside that same segment - the filing currently blends both explanations together at the consolidated level rather than pinning the cause to Brazil specifically.

What it should stop doing: letting the effective tax rate keep drifting upward, quarter over quarter, without a clearer forward view. This is now the second consecutive filing where a rising tax rate - not revenue growth, not opex discipline - has been the single biggest swing factor in whether net income beats or misses, and a rate that moved from 20.5% to 27.0% in one year on largely structural factors (Argentine inflation-adjustment mechanics, dividend withholding taxes) deserves the same forward-guidance treatment MercadoLibre already gives other line items, rather than being explained only after the fact each quarter.

Key Financial Metrics

Three months ended June 30, 2025 vs. three months ended June 30, 2024 - consolidated, reported in USD (MercadoLibre reports natively in dollars; no FX conversion is needed)

Metric	Q2 2025	Q2 2024	YoY
Net revenues and financial income	$6,790M	$5,073M	✅ +33.8% reported (✅ +52.7% FX-neutral)
Gross profit (45.6% margin)	$3,094M	$2,365M (46.6% margin)	⚠️ +30.8%, margin -1.0pp
Product and technology development	$(567)M	$(460)M	⚠️ +23.3%, down to 8.4% of revenue from 9.1%
Sales and marketing	$(751)M	$(511)M	🔴 +47.0%, up to 11.1% of revenue from 10.1%
Provision for doubtful accounts	$(690)M	$(450)M	🔴 +53.3% - credit book still scaling
General and administrative	$(261)M	$(218)M	⚠️ +19.7%, down to 3.8% of revenue from 4.3%
Income from operations (12.2% margin)	$825M	$726M (14.3% margin)	🔴 +13.6% in dollars, but margin -2.1pp - the first margin decline this coverage has measured recently
Foreign currency losses, net	$(117)M	$(58)M	🔴 +101.7%
Effective tax rate	27.0%	20.5%	🔴 +6.5pp - lower Argentine tax-inflation deductions plus dividend withholding-tax drag
Net income	$523M	$531M	🔴 -1.5%
Diluted EPS	$10.31	$10.48	🔴 -1.6%
Adjusted EBITDA»	$1,024M	$880M	✅ +16.4%, margin -1.9pp to 15.1%
Net cash provided by operating activities (quarter, derived)	$2,917M	$1,882M	✅ +55.0%
Free cash flow» (CFO less capex, this coverage's methodology, derived)	$2,630M	$1,698M	✅ +54.9%
Adjusted free cash flow (Company's own non-GAAP measure, derived quarter-standalone)	$522M	$496M	✅ +5.2% - recovered from Q1's -$10M reading
Capital expenditures	$287M	$184M	⚠️ +56.0%
Net debt» (period end)	$3,830M	n/a	⚠️ Up sharply from $2,247M at December 31, 2024 (and from Q1's $2,768M)

Adjusted EBITDA growing 16.4% while GAAP net income fell 1.5% is entirely a below-the-operating-line story this quarter: the tax rate and foreign currency losses (both below Adjusted EBITDA's cutoff) did all the damage, not the underlying commerce or fintech businesses themselves.

Key Operational Metrics

Three months ended June 30, 2025 vs. three months ended June 30, 2024

Metric	Q2 2025	Q2 2024	YoY
Gross merchandise volume» (GMV)	$15,258M	$12,647M	✅ +20.6%
Number of items sold	550M	421M	✅ +30.6%
Total payment volume» (TPV)	$64,602M	$46,328M	✅ +39.4%
Unique active buyers	71M	57M	✅ +24.6% (methodology now includes food delivery transactions, per Company disclosure)
Fintech monthly active users	68M	52M	✅ +30.8%
NIMAL» (Net Interest Margin After Losses)	23.0%	31.1%	🔴 -8.1pp - unchanged from Q1's compression trend
Off-balance-sheet unused credit-card loan commitments	$5,005M	n/a	🔴 Up from $2,872M at December 31, 2024 (+74.3%) - a bigger jump than Q1's own +24.7%
Renegotiated loans as % of loans receivable portfolio	1.7%	n/a	⚠️ Up from 1.4% at December 31, 2024

The Company changed its unique-active-buyer definition this quarter to include food delivery transactions, which mechanically inflates the reported 24.6% growth rate somewhat versus a pure like-for-like comparison - a methodology change worth noting even though the Company doesn't restate the prior-year comparative on the new basis. Off-balance-sheet credit exposure growing 74.3% since year-end - nearly twice the pace of the on-balance-sheet loan book's own 42.2% growth to $9,347 million - is the clearest early signal that credit-card line growth, not funded balances, is now the fastest-growing part of MercadoLibre's fintech risk profile.

Four Country Segments - Brazil's Margin Just Had Its Worst Quarter in This Coverage

Segment	Q2 2025 Revenue	% of Total	YoY Revenue	Direct Contribution Margin, Q2 2025	Direct Contribution Margin, Q2 2024	Margin Change
Brazil	$3,473M	51.2%	✅ +24.7%	15.6%	24.3%	🔴 -8.7pp
Mexico	$1,506M	22.2%	✅ +25.4%	17.8%	16.2%	✅ +1.7pp
Argentina	$1,527M	22.5%	✅ +77.0%	43.3%	44.2%	⚠️ -0.9pp
Other Countries	$284M	4.2%	✅ +27.4%	9.9%	11.7%	🔴 -1.8pp
Total	$6,790M	100%	✅ +33.8%	22.1%	25.2%	🔴 -3.1pp

Brazil's 8.7-point margin collapse is the standout number this quarter and the clearest driver of the consolidated 3.1-point decline. The filing attributes the broader cost pressure (across all segments, not Brazil specifically) to higher shipping-carrier and cost-of-goods-sold spending as the Company keeps shifting logistics work from agent to principal, plus rising fintech funding costs on the growing credit book - directionally the same forces flagged in Q1's post, but landing much harder on Brazil specifically this quarter than last. Argentina again posted the fastest headline growth (77.0%, still substantially an artifact of the country's own inflation and currency mechanics rather than pure demand) while holding its margin nearly flat - now clearly the most profitable and most stable segment of the four, a pattern that has held for two consecutive quarters. Mexico was the only segment to genuinely improve margin this quarter, continuing a trend from Q1.

Beyond the Usual

Off-balance-sheet credit-card exposure grew nearly twice as fast as the funded loan book itself

Unused credit-card loan commitments - the approved-but-undrawn lines that don't appear on the balance sheet - grew from $2,872 million at year-end to $5,005 million as of June 30, 2025, a 74.3% increase, while the on-balance-sheet gross loans receivable portfolio itself grew 42.2% to $9,347 million over the same period. This gap between contingent and funded credit exposure, already flagged as worth watching in Q1, widened materially this quarter rather than stabilizing.

A credit-card business is supposed to carry meaningfully more approved-but-undrawn capacity than drawn balances - this isn't inherently alarming. But the *rate* at which the undrawn commitment is growing relative to the funded book (74% versus 42% over six months) means MercadoLibre's real, ultimate credit exposure is scaling faster than the number a reader would naturally anchor on, and worth tracking for whether utilization eventually catches up.

The effective tax rate's jump is now explicitly tied to dividend withholding taxes, not just Argentine inflation mechanics

Management's own explanation for the tax-rate increase from 20.5% to 27.0% cites, for the first time this coverage has seen in a MercadoLibre filing, "higher permanent differences between tax base and accounting records on subsidiaries subject to withholding tax on dividends" - alongside the more familiar Argentine tax-inflation-deduction mechanics. This lands in the same quarter Argentina eased its foreign-exchange controls (April 11, 2025) to allow dividend remittances abroad for fiscal years starting January 1, 2025 - meaning the ability to actually repatriate cash from subsidiaries now comes with a real, disclosed tax cost that didn't show up as clearly in prior filings when repatriation itself was restricted.

A supplier finance program and buyer protection program both grew their maximum exposure figures, without a change in actual losses

The buyer protection program's disclosed maximum potential exposure rose to $6,500 million from $5,769 million at year-end (+12.7%), while the Company's own reserve against it held nearly flat at $13 million - a similar pattern to the credit-commitment growth above, where headline exposure figures are scaling faster than the provisions held against them. This is standard for a rapidly growing marketplace and not evidence of deteriorating loss rates on its own, but it's the second footnote this quarter showing contingent exposure outpacing both the funded balance and the reserve held against it.

Digital asset holdings gained value purely from Bitcoin's own price move, not new purchases

MercadoLibre's Bitcoin holdings (570.4 units, unchanged from March 31) rose in fair value from $47 million to $61 million - a 29.8% gain entirely attributable to Bitcoin's own price appreciation during the quarter, since the Company neither bought nor sold any units. This is a continuation of the consumer-facing crypto feature flagged in Q1's post, not a new treasury decision, but it's a reminder that a small slice of MercadoLibre's balance sheet now moves with cryptocurrency prices independent of the underlying business.

Coverage Table

Theme	Q2 2025	Q2 2024	YoY	Why it matters
Net revenue and financial income	$6,790M	$5,073M	✅ +33.8%	Growth stayed strong even as profitability weakened
Net income	$523M	$531M	🔴 -1.5%	First YoY net income decline this coverage has measured recently
Brazil direct contribution margin	15.6%	24.3%	🔴 -8.7pp	Largest single-segment margin swing this coverage has tracked for MercadoLibre
Effective tax rate	27.0%	20.5%	🔴 +6.5pp	Now the single biggest swing factor in the net income line, two quarters running
Stock price (quarter close)	$2,613.63	n/a	✅ +34.0% since March 31, 2025	Valuation re-rated sharply in the same quarter operating results weakened

MELI's Stock Rally: Up 120.7% in Two Years, With the Steepest Climb Right Before This Quarter's Weaker Results

MELI shares closed at $2,613.63 on June 30, 2025, up from $1,184.60 two years earlier - a 120.7% two-year gain - and up 34.0% from March 31, 2025's $1,950.87 in a single quarter, a move large enough on its own to warrant a dedicated section rather than folding it into valuation. The rally accelerated through April and May 2025 (to $2,330.85 and $2,563.29, respectively) before this quarter's own results - a margin miss and a net income decline - were even reported, meaning the market was pricing in continued strength well before this filing existed to either confirm or contradict it. No stock split has occurred (MercadoLibre has never split its shares since its August 2007 IPO), so this is a genuine price move, not a share-count artifact.

Target Valuation Range

DCF fair-value range: roughly $133.1 billion (base case) to $224.7 billion (bull) enterprise value - the base case now covers only about 98% of the current $136.3 billion EV, down from Q1's ~110%. Roughly fairly valued to modestly rich, because the stock's own 34% quarterly rally outpaced the growth in trailing cash flow - the multiple expansion, not a change in the underlying DCF assumptions, is what closed the gap.

Market cap → enterprise value	Q2 2025
Share price (period-end, Jun 30, 2025)	$2,613.63
Shares outstanding	50,697,375
Market capitalization	$132.5B
Total debt	$8,979M
Less: cash and digital assets	$2,880M
Less: unrestricted ST investments	$965M
Less: LT investments	$1,304M
Net debt»	$3,830M
Enterprise value	$136.3B

Enterprise value is up 34.1% from Q1's $101.7 billion in a single quarter.

Valuation multiples	Q1 2025	Q2 2025	Change
TTM Net revenue	$22.38B	$24.1B	✅ up
TTM Net income	$2.06B	$2.05B	⚠️ ~flat
TTM Free cash flow (CFO less capex)	$6.45B	$7.39B	✅ up
EV/Sales	~4.5x	~5.7x	⚠️ up
P/E	~48x	~65x	⚠️ up sharply
EV/FCF	~15.8x	~18.5x	⚠️ up

Both multiples expanded even as trailing net income itself barely grew, since this quarter's own net income decline dragged the trailing figure down slightly relative to what continued Q1-pace growth would have produced.

DCF (base/bull, illustrative):

Scenario	Key assumption	Discount rate	Terminal growth	Enterprise value
Current (Q2 2025 close)	— actual market price, for reference	—	—	$136.3B
Base	Growth decelerating from 22% to 11% over five years; FCF margin starting at ~27% and rising to 30% by year five	13%	4%	$133.1B (~98% of current EV), essentially in line with the current price rather than clearly cheap or expensive
Bull	Revenue growth of 28%/23%/19%/16%/13%; FCF margin rising from 29% to 34%	11.5%	4.5%	$224.7B (~165% of current EV) - requires Brazil's margin compression to reverse rather than persist, and the tax-rate increase to prove temporary rather than structural

Reverse DCF: holding a 13% discount rate and solving for the perpetual FCF growth rate that would justify today's $136.3 billion enterprise value on the $7.39 billion trailing FCF base gives roughly 7.2% growth, forever - up from Q1's ~6.3%, meaning the market is now pricing in a somewhat higher permanent growth rate than it was three months ago, despite this quarter's own numbers (margin compression, a net income decline) pointing the other direction.

The clearest swing factor for this valuation is whether Brazil's margin collapse and the tax-rate jump both prove to be one-quarter readings or the start of a durable trend - the base case's roughly-fair verdict flips meaningfully in either direction depending on which one turns out to be true.

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