Mercadolibre Posts Impressive Profitability, Sales Resilience Despite Macro Pressure; Shares Cheap

Wide-moat Mercadolibre posted robust quarterly earnings, with strong growth across its commerce (22.5%), financial technology (63.5%), and credit (152%) segments, despite surging regional interest rates and declining consumer sentiment. It was encouraging to see strong growth in active users (11.8%) across platforms, attesting to the compelling value proposition the firm has spun around its commerce, digital wallet, and credit business lines, while the expansion of the nascent ads business—up 40 basis points to 1.3% of gross merchandise volume—helped drive record quarterly operating profitability. This last point is perhaps the most important, with management's decision to funnel capital toward longer-term and profitable growth, continuing to yield steady operating leverage, with 11% operating margin marking the highest quarterly print since the second quarter of 2019, by our estimates. On the other side of the coin, the willingness to eschew value-dilutive projects continues to impress, and supports our Exemplary capital allocation rating for the name—in this case, attested to by management's willingness to slow growth in the Brazilian credit business as lending conditions softened, and to pull back on the unprofitable first-party business. While earnings were impressive, only the acceleration of profitability truly bucked our expectations, underpinning our expectation for a low-single-digit increase to our $1,100 fair value estimate.