MercadoLibre is growing faster than it has in four years. For the first time, revenue has exceeded $10 billion per quarter. Despite this, the stock has fallen 30% from its peak.
We expect continued strong growth and a 10% EBIT margin in the long term. However, the high country risk is weighing on the valuation. Feel free to delve into the details of our report.
Our conclusion: Strong growth, too high a price. Despite the positive outlook, the stock is currently overpriced.
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Nice article! I'm working on a valuation approach combing your normalized OCF approach with Hated Moats' SOTP approach. Will give you a shout out in my upcoming podcast episode with Shivam from X talking about his trip to Brazil and doing a MELI update.
Nice review and despite what look like much more conservative assumptions the valuation comes out much the same and substantially above the current share price. I can only assume that the much higher base than you previously assumed is responsible. My views are that margins will recover in a year or two and the nature of the highly interlocked business model for margins is upwards. Latin America is so underdeveloped that modelling the future is inevitably cautious. Plus AI and robotics will produce huge improvements in business performance. Maybe in a year or two you will produce another model that again will work off a higher base than you now think, with more optimistic assumptions about future margins etc. I've been adding a lot at around 1600.
Two things make my stance more cautious than this article's.
First, a part of MELI's business that rarely gets discussed: float. They hold an enormous amount of money that isn't theirs and put it to work funding growth, much like Buffett did with insurance premiums. But regulators are increasingly aggressive about float, requiring more and more of that cash to sit restricted in government bonds or similar instruments.
Second, an 11% discount rate is still too favorable given the equity risk premium in Latin America. Damodaran estimates total ERP for Argentina at 13.94%. For the US it's 4.46%. Add even two points to the discount rate and a big part of terminal value disappears.
Revenue exposure is the link. ERP builds up in layers: mature-market premium (~4.5% in the US), plus country risk weighted by where the revenue comes from, then company-specific adjustments on top. Size and dominance move that last layer. They don't touch the second one.
MELI can win every competitive fight in Argentina and still see the earnings devalued, because the Argentine economy is less stable. Imagine your customers suddenly have less disposable income, for you and for your competitors alike. That's not a risk you can out-execute, and the discount rate just reflects it.
Thanks for the feedback. As you'll see in the model, I've completely excluded any benefit from the float in my valuation. I've normalised free cash flow to a fraction of the reported figure and also reduced the net cash position by the funds held on behalf of merchants. In other words, I'm not giving MELI any credit for that cash.
On the discount rate, I don't believe in applying a country-specific discount rate to an individual company. The discount rate should reflect the equity risk premium of the business itself, which will naturally vary from company to company.
I'm comfortable using 11% because I'm very familiar with the business. I've followed it for many years and have spent months in the regions where it operates, something the vast majority of investors can't say. I have no issue with others using a higher discount rate if that's appropriate for their own level of understanding and conviction in the business.
Fair enough on the normalization, that's a real adjustment. On the discount rate I'd frame it differently: it's what the marginal investor demands to hold these cash flows, not what I'd demand knowing what I know. And that variable is the crux here. Terminal value is 57% of your EV, so most of the 44% upside sits in that one input. At 13% it shrinks to 11%. At 13.95% it's zero.
If the objective is to explain today's market price, then yes, the relevant discount rate is whatever the marginal investor requires today.
But that's not what a DCF is for. A DCF is an estimate of intrinsic value. Intrinsic value isn't determined by the beliefs of the marginal investor, it's determined by the cash flows the business will generate and the opportunity cost of capital appropriate for the risk of those cash flows.
If intrinsic value were simply whatever the marginal investor demanded, there would be no such thing as mispricing. Every stock would always be fairly valued by definition. The entire premise is that the market's required return can deviate from fundamental value for extended periods.
I also don't think an investor should deliberately use a higher discount rate simply because they're less familiar with a business. Lack of knowledge should either lead to more research or passing on the investment altogether. A discount rate isn't a catch all adjustment for uncertainty or ignorance. It's meant to reflect the riskiness of the cash flows, not the analyst's confidence.
As for the sensitivity, I completely agree. Terminal value is highly sensitive to the discount rate. Every DCF is sensitive to its key assumptions. The fact that valuation changes materially between 11% and 13.95% isn't evidence that 11% is wrong, only that the discount rate matters.
Agree on the marginal investor, that was sloppy phrasing on my part. Intrinsic value doesn't track what the market demands.
But I'd take your own sentence: the discount rate reflects the riskiness of the cash flows, not the analyst's confidence. That's exactly my point, and I think it cuts against the 11%. Roughly half of MELI's cash flows are Argentine and Brazilian, in currencies with structural devaluation risk. You cite that risk yourself, both for the FX backdrop and as the reason terminal growth stays at 2%. So the risk is identified. I just don't see it fully priced.
On sensitivity, agreed that it isn't evidence of error. My point was narrower: 57% of your EV rides on that input, each percent point matters, so I'd like to hear the case for 11% specifically.
Where we differ is that I don't think operating in Brazil and Argentina automatically translates into a materially higher cost of equity. I don't think country exposure maps one for one to equity risk. If it did, every business operating in Brazil or Argentina would deserve a similar discount rate, regardless of competitive position, balance sheet or pricing power.
MELI has spent over two decades successfully navigating inflation, currency devaluations, recessions and political instability while consistently compounding revenue and free cash flow. Those risks are real, but I'd rather reflect them in the cash flow assumptions than add another risk premium and risk double counting them.
As for 11%, it's a judgment based on the resilience and quality of the business. I think MELI's competitive advantages, diversified revenue streams, strong balance sheet and management team make the equity less risky than a simple geographic lens would suggest.
So I agree the discount rate deserves scrutiny. I just don't think Latin America is, by itself, sufficient justification for moving from 11% to 13% or 14%.
Thanks for the explanation. That's a valid position and identifying that cost of capital is lower than a textbook would suggests might actually be the source of edge. So I think it is not that we differ on geography lens per se; rather I don't want to bet on my judgment about such annoyingly hard to quantify and track metric as cost of capital.
Nice work as always. I like NU and SE - and I am starting to research MELI in more depth now. All three of these are impressive companies in my opinion. Who knows how this market looks in 10 years - is there a possibility that these three companies hurt each other's margins given how competitive they are? Or can all three do well given the large market they are growing into?
Thanks for the feedback. With regard to market share in FinTech, I expect all three to take market share from the incumbent banks rather than each other. E-commence and fintech are both large and expanding markets especially in these geographies.
Good points.
Our view:
MercadoLibre is growing faster than it has in four years. For the first time, revenue has exceeded $10 billion per quarter. Despite this, the stock has fallen 30% from its peak.
We expect continued strong growth and a 10% EBIT margin in the long term. However, the high country risk is weighing on the valuation. Feel free to delve into the details of our report.
Our conclusion: Strong growth, too high a price. Despite the positive outlook, the stock is currently overpriced.
How is the price too high? What is your fair value and what are the assumptions.
We calculated a share value of USD 1.538 on 19th of August 2026. On the second screen our assumptions and the full DCF-model.
Hi! My publication Strata publishes an investor-oriented newsletter that touches on corporate events (e.g., special situations), governmental regulations, and patent news that hopefully offers to long-term focused investors. Feel free to check it out. It is all free.
Nice article! I'm working on a valuation approach combing your normalized OCF approach with Hated Moats' SOTP approach. Will give you a shout out in my upcoming podcast episode with Shivam from X talking about his trip to Brazil and doing a MELI update.
Awesome. Please do ping me the link when it’s out so I can listen 👌
Nice review and despite what look like much more conservative assumptions the valuation comes out much the same and substantially above the current share price. I can only assume that the much higher base than you previously assumed is responsible. My views are that margins will recover in a year or two and the nature of the highly interlocked business model for margins is upwards. Latin America is so underdeveloped that modelling the future is inevitably cautious. Plus AI and robotics will produce huge improvements in business performance. Maybe in a year or two you will produce another model that again will work off a higher base than you now think, with more optimistic assumptions about future margins etc. I've been adding a lot at around 1600.
Two things make my stance more cautious than this article's.
First, a part of MELI's business that rarely gets discussed: float. They hold an enormous amount of money that isn't theirs and put it to work funding growth, much like Buffett did with insurance premiums. But regulators are increasingly aggressive about float, requiring more and more of that cash to sit restricted in government bonds or similar instruments.
Second, an 11% discount rate is still too favorable given the equity risk premium in Latin America. Damodaran estimates total ERP for Argentina at 13.94%. For the US it's 4.46%. Add even two points to the discount rate and a big part of terminal value disappears.
I go into both points and run scenario analysis here: https://theinvestlog.com/p/mercado-libre-reverse-dcf-pricing. Would love your thoughts.
I'm confused, what's the equity risk premium have to do with the country a business operates in. Isn't that a strictly business by business decision?
I'd rather put a higher premium on a small cap business than on one of the more dominant companies in latam.
Revenue exposure is the link. ERP builds up in layers: mature-market premium (~4.5% in the US), plus country risk weighted by where the revenue comes from, then company-specific adjustments on top. Size and dominance move that last layer. They don't touch the second one.
MELI can win every competitive fight in Argentina and still see the earnings devalued, because the Argentine economy is less stable. Imagine your customers suddenly have less disposable income, for you and for your competitors alike. That's not a risk you can out-execute, and the discount rate just reflects it.
Thanks for the feedback. As you'll see in the model, I've completely excluded any benefit from the float in my valuation. I've normalised free cash flow to a fraction of the reported figure and also reduced the net cash position by the funds held on behalf of merchants. In other words, I'm not giving MELI any credit for that cash.
On the discount rate, I don't believe in applying a country-specific discount rate to an individual company. The discount rate should reflect the equity risk premium of the business itself, which will naturally vary from company to company.
I'm comfortable using 11% because I'm very familiar with the business. I've followed it for many years and have spent months in the regions where it operates, something the vast majority of investors can't say. I have no issue with others using a higher discount rate if that's appropriate for their own level of understanding and conviction in the business.
Fair enough on the normalization, that's a real adjustment. On the discount rate I'd frame it differently: it's what the marginal investor demands to hold these cash flows, not what I'd demand knowing what I know. And that variable is the crux here. Terminal value is 57% of your EV, so most of the 44% upside sits in that one input. At 13% it shrinks to 11%. At 13.95% it's zero.
I think we're talking about two different things.
If the objective is to explain today's market price, then yes, the relevant discount rate is whatever the marginal investor requires today.
But that's not what a DCF is for. A DCF is an estimate of intrinsic value. Intrinsic value isn't determined by the beliefs of the marginal investor, it's determined by the cash flows the business will generate and the opportunity cost of capital appropriate for the risk of those cash flows.
If intrinsic value were simply whatever the marginal investor demanded, there would be no such thing as mispricing. Every stock would always be fairly valued by definition. The entire premise is that the market's required return can deviate from fundamental value for extended periods.
I also don't think an investor should deliberately use a higher discount rate simply because they're less familiar with a business. Lack of knowledge should either lead to more research or passing on the investment altogether. A discount rate isn't a catch all adjustment for uncertainty or ignorance. It's meant to reflect the riskiness of the cash flows, not the analyst's confidence.
As for the sensitivity, I completely agree. Terminal value is highly sensitive to the discount rate. Every DCF is sensitive to its key assumptions. The fact that valuation changes materially between 11% and 13.95% isn't evidence that 11% is wrong, only that the discount rate matters.
Agree on the marginal investor, that was sloppy phrasing on my part. Intrinsic value doesn't track what the market demands.
But I'd take your own sentence: the discount rate reflects the riskiness of the cash flows, not the analyst's confidence. That's exactly my point, and I think it cuts against the 11%. Roughly half of MELI's cash flows are Argentine and Brazilian, in currencies with structural devaluation risk. You cite that risk yourself, both for the FX backdrop and as the reason terminal growth stays at 2%. So the risk is identified. I just don't see it fully priced.
On sensitivity, agreed that it isn't evidence of error. My point was narrower: 57% of your EV rides on that input, each percent point matters, so I'd like to hear the case for 11% specifically.
Where we differ is that I don't think operating in Brazil and Argentina automatically translates into a materially higher cost of equity. I don't think country exposure maps one for one to equity risk. If it did, every business operating in Brazil or Argentina would deserve a similar discount rate, regardless of competitive position, balance sheet or pricing power.
MELI has spent over two decades successfully navigating inflation, currency devaluations, recessions and political instability while consistently compounding revenue and free cash flow. Those risks are real, but I'd rather reflect them in the cash flow assumptions than add another risk premium and risk double counting them.
As for 11%, it's a judgment based on the resilience and quality of the business. I think MELI's competitive advantages, diversified revenue streams, strong balance sheet and management team make the equity less risky than a simple geographic lens would suggest.
So I agree the discount rate deserves scrutiny. I just don't think Latin America is, by itself, sufficient justification for moving from 11% to 13% or 14%.
We used a country risk of 8.4% for MercadoLibre (our standard hurdle rate is 6%). Quite fair and positive we think. Cost of equity then 13.3%
Dive the report if you like.
Thanks for the explanation. That's a valid position and identifying that cost of capital is lower than a textbook would suggests might actually be the source of edge. So I think it is not that we differ on geography lens per se; rather I don't want to bet on my judgment about such annoyingly hard to quantify and track metric as cost of capital.
Nice work as always. I like NU and SE - and I am starting to research MELI in more depth now. All three of these are impressive companies in my opinion. Who knows how this market looks in 10 years - is there a possibility that these three companies hurt each other's margins given how competitive they are? Or can all three do well given the large market they are growing into?
Thanks for the feedback. With regard to market share in FinTech, I expect all three to take market share from the incumbent banks rather than each other. E-commence and fintech are both large and expanding markets especially in these geographies.