MELI is the e-commerce and logistics king of most of Latin America. It has a thriving marketplace and fulfillment business, with support for 3rd party merchants. It also features a rapidly growing financial services suite and payments platform, entertainment offerings through partnerships, a quickly growing ads business and a multi-tiered loyalty program called MELI+ where it laces product utility into one unique consumer bundle. The business model resembles Amazon without cloud computing and with financial services. Here are the names of its various products:

Note that Meli made a series of changes to reporting disclosures starting two quarters ago. First, Mercado Pago, the interest income/expense item was moved from below the EBIT line to above it. This will make margin comps slightly tougher through Q1-25. For Mercado Envios, it changed its position from an agent to a principal. This means it now reports gross revenue and treats shipping as an input cost. Previously, it netted shipping costs out of reported revenue. As this increased reported revenue on an apples-to-apples basis, this will boost revenue growth a bit through Q1-25 and dilute margins. Finally, it removed peer-to-peer volume from total payment volume (TPV).

Demand remains exceptional. Engagement and retention are both at record levels, as items sold per unique buyer rose from 7.5 to 7.8 Q/Q.

Net Interest Margin After Losses (NIMAL) measures credit revenue - credit provisions - funding costs. It’s somewhat similar to NU’s risk-adjusted net interest margin (NIM). Higher is better. 15-90 day non-performing loan rate measures the proportion of loans 15-90 days past due. Lower is better. 15+ day provision coverage measures allowance for doubtful accounts divided by NPL. It measures how well covered MELI is in terms of having capital for future losses. Higher is better. Provision coverage was 102% vs. 104% Q/Q & 107% Y/Y.

Meli trades for 50x 2025 EPS estimates. I think that will end up being closer to 45x following more revisions. EPS is expected to grow by 21% this year and by 39% next year.

Commerce – Marketplace:

Meli continued to work hard on driving broader assortment throughout the year and during Q4. It added higher-end brands like Natura, Ralph Lauren and Lacoste and a plethora of value-oriented brands too. While it has dominated in areas like electronics and apparel, it aims to dominate elsewhere. Investments in user experience improvements have already helped drive grocery and auto part momentum. If you’ll recall, last quarter it added appointment booking for auto repairs, and the reception was strong. Whether it’s that, virtually trying on items, apparel size standardization, its new grocery storefront (Full Super) with easier navigation and more… it is “removing specific friction for each category.” Impressively, this work has helped push the proportion of monthly active buyers purchasing from 3+ categories by 20 full points since 2020. This continues to tick higher and deliver consistently higher retention, engagement and lifetime value (LTV).

While Meli’s marketplace is now massive, it thinks the runway is also still massive. As buyer growth has now accelerated for 3 straight quarters and FXN expansion remains wildly impressive, I’d have to agree. As a reminder, Latin America trails the USA by 10 years in terms of e-commerce adoption. As it rounds out its assortment and expands into more categories, it expects to further enable and accelerate the shift to online retail. 

In Argentina, despite continued rampant Y/Y inflation, trends were called “encouraging.” Items sold rose 18% Y/Y to mark more acceleration from 10% last quarter. The Q/Q slowing in revenue growth there was due to tougher comps this quarter vs. last quarter. The country is moving to lower-priced goods like consumer staples, which is lowering average selling prices there. They’re ok with this, as it also means more frequency, more habit building and likely more discretionary volume as macro brightens more. Considering Argentina is its highest margin ceiling market, this should be great for 2025 profitability.

“We are very optimistic about what's going on in Argentina. We saw a recovery in the second half of the year… the loan book is very profitable, NPLs are under control and with lower rates, people are taking more risk.”

CFO Martin de Los Santos

“As improving macro trends begin to drive a recovery of demand, we are optimistic about the growth opportunities ahead, and we intend to invest accordingly.”

Shareholder Letter

Commerce – Logistics:

Meli’s best-in-class Latin American fulfillment network is the gasoline to the marketplace’s engine. Many years of hefty investments to create an unmatched footprint, optimize inbound/outbound inventory placement and support merchants are working. Its overall drive for optimal efficiency is paying off. Whether it’s more order batching, upgraded shelving systems or iterations of its routing algorithms, cost per package either fell Y/Y or rose slower than inflation.

Unmatched efficiency means it can operate at higher margin AND pass savings onto customers. This is translating into higher conversion rates, higher frequency, higher retention and more Mercado Libre market share on a Y/Y basis in Brazil, Argentina and Mexico. Furthermore, the large base of fulfillment centers create an infrastructure moat that is very hard to match from a cost point of view.

Interestingly, same-and-next-day delivery rates actually fell from 52% of shipments to 49% Y/Y. That’s not related to service quality. On-time and late deliveries both set new records for the quarter and delivery speed promises “improved Y/Y” with new urban fulfillment capacity across Brazil. The 3-point Y/Y decline is related to people opting into longer waits and lower costs, as well as the proliferation of Meli Delivery Day (pick a day in a week to get all of your packages).

“There are no silver bullets when it comes to driving logistics efficiency. Instead, our focus is on dozens of small incremental gains that compound over time.”

IR Director Richard Cathcart

Financial Services – General Progress

Financial service adoption was called “strong” in all 3 of its main countries as it accelerates the cross-selling push. It continues to find better product-market fit, as net promoter scores (NPS) set new multi-year highs across the board. This is helping drive adoption and even faster growth within its power user cohort. High-yield deposit accounts are working exactly as planned, with assets under management (AUM) up 129% Y/Y to $10.6 billion. Significant liquidity to fund its credit business.

Meli thinks it has the “right to win” in financial services. This conviction comes from its beloved product suite, as well as its fiercely loyal and engaged customer base. Common interactions and more repayment history naturally allow MELI to know its borrowers better than a traditional bank. This means sharper underwriting.

Financial Services – Credit Card

“Having a solid credit card offering is critical to our ambition of becoming the largest digital bank in Latin America and leveraging our unique competitive advantages in underwriting and distribution.” 

CFO Martin de los Santos

Performance for the MercadoPago credit card “reaffirmed confidence in its ability to be one of the winners in this market.” Underwriting models keep rapidly improving, which is leading to first-payment defaults reaching record lows in Brazil. Despite worsening macro. This is enabling it to get more aggressive on issuance and limits, but it is paying close attention to macro trends. 

The card product is quite popular. It was briefly the most used credit card on Mercado Marketplace in Brazil during the holidays. Furthermore, card users overall are delivering 10% GMV lifts on average to show how effective this is at spinning the engagement flywheel and delivering compelling financial outcomes.

“Growth was solid across geographies, particularly in Argentina where improving macro trends are supporting the approval of larger credit lines to more consumers.”

Letter

In terms of credit health and performance, all cohorts that are 2+ years old now have positive NIMALs as hoped for; some already have a 10%+ NIMAL and its newest customer cohorts are on an even better path. Credit loss provisions did spike higher by 77% Y/Y, but that’s related to successful adoption and strong growth of the card. Again, as it front-loads card losses, a larger portion of its customers being new will mean provision intensity is higher. This directly impacts NIMAL and is what happened this quarter (and through most of 2024). More generally speaking, credit cards also naturally come with higher provisioning intensity than its other credit products, and cards as a % of its loan book rose from 32% to 40% Y/Y.

“The increase in provisions as a percentage of revenue is a natural consequence of the growth of our credit business and the shift in mix towards the credit card. Credit quality remains sound, as demonstrated by stable NPLs and lower provisions as a percentage of the portfolio. This, along with the strong NIMAL spread across all products, gives us confidence to continue expanding our profitable credit business.”

Shareholder Letter

“We'll continue investing in our platform to capture these opportunities, even if sometimes they put short-term pressure on margins.”

CFO Margin de los Santos

Outside of its credit card business, merchant and consumer loans continue to perform well and deliver strong NIMAL. This performance helped offset card expansion investments and allowed NIMAL to expand Q/Q. One more quick note on NIMAL. Aside from mix-shift to credit cards, shifting to lower-risk and higher-quality borrowers is also having a small impact on this important margin.

Acquiring TPV:

This refers to the piece of Mercado Pago that lets merchants seamlessly tap into its easier payment options to augment conversion rates. Acquiring TPV happens whenever Mercado Pago is used as the main payment facilitator/processor on the marketplace or on a merchant’s own site. “Faster processing times, higher approval rates and more availability are all driving lower churn and higher NPS.” It also rolled out its initial point of sale software to join the existing hardware offering. It’s excited about this, but knows it has a long way to go on product-market fit. Acquiring TPV growth accelerated in Brazil, Mexico and Chile during the quarter.

To continue helping sellers in 2024, it debuted new page customization tools and coupons/ads to target their highest intent buyers. It also added a dynamic pricing tool to nudge best practices amid a given competitive backdrop.

Advertising:

Ad revenue rose by 41% Y/Y (88% FXN growth) to eclipse 2% of total GMV. A lot of this is still being driven by product and brand ads. It has a lot of progress to enjoy within display and video ad formats. Just like for Uber and any other massive marketplace layering on more ad impressions, this will be a material margin tailwind for the foreseeable future.

More on Macro:

Macro concerns in Brazil are quite loud right now. While it has seen “no signs of credit deterioration” there, it has preemptively pulled back on micro-loans and some higher-risk cohorts to ensure things stay strong. It doesn’t expect this to materially impact GMV growth in 2025.

h. Take

Phenomenal quarter. There is nothing to pick at here. Only continued masterful execution to celebrate (despite macro weakening in its region). Well done… again.

“As we enter 2025, we are more optimistic than ever about the opportunities that lie ahead.”

CFO Margin de los Santos