Mercado Libre Shares Decline Following JP Morgan Downgrade Over Credit and Cost Concerns

Shares of Mercado Libre experienced a 2% decline on Wednesday following a downgrade by JP Morgan. Previously rated as “overweight,” the bank has adjusted its rating to a more cautious “neutral.”

The downgrade is based on concerns that, despite the stock’s impressive 62% rally over the past year, the potential for further upside is limited. Analysts at JP Morgan cite several factors impacting Mercado Libre’s short-term outlook, with a significant focus on its credit business, particularly its developing credit card operations.

While the credit card service is crucial for expanding the company’s digital banking ecosystem, it is expected to negatively affect overall net interest margins. JP Morgan anticipates that the Net Interest Margins After Losses (NIMAL) from credit cards will be slightly negative in the initial stages, potentially leading to a decline in consolidated NIMAL from 36% in 2023 to around 24% by 2027.

Additionally, concerns surrounding the company’s logistical expansion have been highlighted. Mercado Libre recently opened five new distribution centers in the third quarter of 2024, a move that is likely to increase operational costs in the short term. Although the long-term benefits of these centers are acknowledged, the upfront expenses may impact profit margins initially.

Moreover, the analysts raised issues regarding the normalization of the company’s income tax rates and anticipated foreign exchange losses. They indicated that the effective tax rate of 20% observed in the second quarter may not be sustainable, with expectations leaning closer to 34%. Foreign exchange losses, which had previously been minimal, are also projected to worsen.

Overall, JP Morgan’s revised outlook implies that while Mercado Libre possesses long-term growth potential, its stock may struggle to surpass expectations in the near term. The brokerage also pointed to high valuations, noting that the company is trading at 24 times EV/EBITDA and 49 times P/E for 2025, expressing skepticism about achieving further gains without the company exceeding earnings forecasts.