JP Morgan downgraded Mercado Livre’s stock to ‘neutral’ after the stock surged 62% in the last 12 months and left little room for a consensus revision upwards.
The bank also stated that the company will face short-term pressures on results, coming from the growth of the credit card business and substantial expansion of the company’s logistics infrastructure.
Mercado Livre’s stock dropped nearly 4% in early afternoon trading, with the company being valued at $100 billion on the Nasdaq.
Analysts Marcelo Santos and Jessica Mehler say that the credit card is key to scaling the digital bank and increasing primacy.
However, the report states, “We believe that the short-term pressure imposed by a very low initial spread is not fully understood by the market. The credit card spread should be marginally negative, and should lead the company’s consolidated spread from 36% in 2023 to 32% this year, 27% in 2025, and 24% in 2027.”
Last month, MELI announced that it will double its distribution centers in Brazil, increasing from 10 currently to 21. The company said that this logistic expansion should not pressure margins.
However, JP Morgan believes that the opening of distribution centers — five of them already in the third quarter — “will likely cause some short-term cost increases.”
All these factors limit the potential for an upside in market projections, making the probability of a stock revaluation low.
JP is in line with consensus on revenue estimates for next year, but is significantly lower in EBIT (-9%) and profit (-15%).
“We are also projecting a miss on EBIT for the third quarter,” wrote the analysts.
According to JP’s calculations, Mercado Livre’s stock currently trades at 24x estimated EBITDA for next year and 49x earnings — an extended valuation. For comparison, Amazon trades at 13x and 32x, respectively.
“Our downgrade is mainly due to short-term prospects for the stock. We still remain positive on MELI’s long-term outlook, including the potential for e-commerce growth in the region and the substantial opportunity in digital banking. Faster penetration of the advertising business or credit growth could make us more constructive in the short term.”
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Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
