The vast majority of this week’s content has already been sent. I plan to publish a make-up review for The Trade Desk, as well as more detailed coverage of the ServiceNow Investor event in the coming days. Earnings reviews of Nu, Hims and a few other names are also coming next week. The show goes on.

I posted the first part of the earnings review earlier in the week. That offered coverage of everything besides the call Q&A. This offers a contextualized review of that Q&A.

Lowered Brazil Merchant Take Rates:

MELI lowered take rates on some categories and price points in March. This will place a bit of incremental pressure on margins next quarter, and is meant to push merchants to keep their marketplace pricing lower. Like the reduced free shipping threshold, this is meant to fortify MELI’s competitive value proposition and lead in Brazil as Sea Limited, Amazon and Chinese competition push for market share. Similar decisions in the past have always led to more engagement and volume, and as the review from a couple days ago laid out, that’s happening here as well.

Net Interest Margin After Losses (NIMAL) & Credit Health:

Leadership got a few questions on the sources of the NIMAL contraction despite explicitly saying where it came from in the letter. ⅔ of the contraction was from mix shift to credit cards and the associated lower spreads and provisioning. As a reminder, card cohorts in Brazil are maturing as expected and giving the team more confidence in this being a long-term profit driver. Extended loan duration in Brazil from 5 months to 8 months also contributed to the NIMAL contraction. This decision means more provisioning, but 8 months is still much shorter than average incumbent duration. The rest of the impact was from sweetening credit offers to prime borrowers who didn’t accept previous offers and expanding into some more risky credit cohorts. I candidly didn’t love hearing that last part. I’d rather see 80% credit card growth with a fixation on higher-quality borrowers instead of 100%+ expansion. But their credit health looks good despite mixed economic health in its major markets. They’re confident in properly pricing these borrowers.

MELI thinks its non-performing loan (NPL) rate improvement in Argentina (while others saw their NPLs worsen) is related to a few things. First, their ubiquitous brand has made it easy to find pristine borrowers to issue cards to. They also have much shorter loan duration than banks and extensive customer repayment data profiles thanks to the company marketplace. In terms of their newer Argentinian credit card business, they like what they’re seeing and think trends mirror how the Brazil launch went.

“We continue to monitor or manage our credit book very cautiously. If you look at the NPLs, despite the macro conditions that you described, they continue to be fairly stable in all of the countries where we operate, including Brazil.” – CFO Martin de los Santos

17% Y/Y Reduction in Unit Shipping Cost Sources:

Improvements here are coming from three places. First, volume growth is allowing MELI to improve capacity utilization rates. Second, their slow shipping option is allowing MELI to more patiently select capacity and methods for shipping, enabling more cost relief. Lastly, tech and automation investments lowered costs more. There’s more progress to be enjoyed in all three of these areas.

More Notes:

Concluding Thoughts:

The two bear cases I’m seeing following this report are Brazilian competition forcing MELI to lower fees and the rapid credit growth with some expansion to riskier cohorts. Starting with competition. There is absolutely truth to the argument that MELI is cutting fees and free shipping thresholds to solidify and elongate its lead in Brazil. If there was no competition, they would not be doing these things. We just have direct historical evidence pointing to their strong ability to recover this margin loss and then some with volume over time. And this time around, that process is unfolding even more quickly. It’s time to flex and extend their logistics and e-commerce muscles, and they are. Brazil is arguably the most compelling e-commerce market on the planet right now in terms of a blend of affluent population and lower penetration. Competition is inevitable and MELi doing what it needs to do to keep winning and bigger pieces of the pie is something I support.

On the rapid credit growth, I do find this a tad aggressive. I don’t think they need to find growth with riskier cohorts right now and would love to see a modestly slower rate of expansion without making this decision. And while that’s my preference, I’m still encouraged by the resilient credit health and view this fintech business as highly strategic for cross-selling, loyalty program utility, differentiation and durable growth.  The balance sheet is very strong and cash flows should still be meaningfully positive this year despite billions in credit growth-related outlays. They’ve demonstrated an ability to effectively underwrite across a wide range of cycles and a willingness to quickly pull back whenever anything starts to look slightly weaker. So while this rapid growth does make me a bit nervous I do deeply trust this team and understand why they’re reacting to promising credit performance in this way. It’s just something to keep a very close eye on.

I remain a confident shareholder.  This is a large position, but I would look to add in the low $1500s. That would be 31x earnings for a company that should resume 40%+ EPS compounding starting in 2027. I think we’ll give time this year to add more shares and I plan to do exactly that if I get the chance.

Headlines: