MercadoLibre (MELI): Revenue Up 50%. Operating Profit Down 17%.

MercadoLibre, Inc. (MELI) Q2 2026 — Net revenues $10,169M UP 49.8% (up 43% FX-neutral), the fastest in four years. Income from operations $683M DOWN 17.2% - a 6.72% margin against 12.15%. EPS $9.19 beat a ~$8.69 bar but fell 10.9% from $10.31. Incremental operating margin on $3,379M of new revenue: NEGATIVE 4.2%. MercadoLibre grew revenue 49.8% - the fastest in four years - and beat the bar. Operating profit still fell 17.2%, and the margin has gone 12.66% to 11.08% to 8.26% to 6.72% across four periods. At $1,922.57 the market underwrites a 13% margin this company has never earned for a full year. THE CALL: HOLD (3/5, FIFTY PERCENT GROWTH THAT DOES NOT REACH THE OPERATING LINE) — base-case value ~$1675.0 vs ~$1922.57 today. KEY METRICS: - CALL: HOLD 3/5, fair value ~$1,675 vs the $1,922.57 close (-13%), below the Street's $2,166.67 average (+13%). Base $1,582 (margin recovers to 11.0%, below the FY2024 peak), bear $1,197 (margin never recovers past 8.5%), bull $1,890 (13.0% margin, above the FY2024 peak, revenue still compounding 28%). Exit-multiple cross-check $1,928. Run backwards: $1,922.57 already requires ~13% operating margin; the Street's target needs ~15% - a margin MELI has never earned for a full year against a best-ever 12.66% in FY2024. - THE MARGIN IS A STAIRCASE, NOT A STUMBLE. Income from operations as a share of revenue: FY2024 12.66% ($2,631M on $20,777M), FY2025 11.08% ($3,201M on $28,893M), trailing twelve months 8.26% ($2,907M on $35,182M), Q2 2026 6.72% ($683M on $10,169M). That is 594bps of compression over two years while revenue nearly doubled. This quarter alone the margin fell 543bps year on year, from 12.15%. - THE CREDIT BOOK IS THE STORY - ARITHMETIC, NOT CREDIT QUALITY. The portfolio is $16B, up 75%, and almost half is now the credit card (a fifth four years ago). Asset quality is fine: the 15-90 day non-performing ratio is 4.6%, near an all-time low. But the provision for doubtful accounts was $1,276M, up 84.9% against revenue growth of 49.8%, and is now 12.55% of ALL revenue vs 10.16%. Net interest margin after losses fell to 20.7% from 23.0%, and the credit card's own margin went from breakeven to NEGATIVE 2.5% - 2.6M new cards issued this quarter against 1.6M, and fresh cohorts are dilutive before they season. - THE CASH IS THINNER THAN THE PROFIT. Adjusted free cash flow was $214M on $10,169M of revenue - 2.1% of sales, and less than half the $466M of reported net income, after $441M of capex and $2.1B put into the credit portfolio (partly offset by $560M of fintech funding). First-half operating cash flow of $5,737M flatters badly: $2,456M is funds payable to customers and $1,209M is amounts payable on card transactions - float, not earnings - while the $4,069M that went into loans sits down in investing. Total assets $51,356M against $7,834M of equity: equity is 15.25% of assets. - THE BULL CASE IS REAL, AND IT IS THE ENGAGEMENT. Items per buyer rose ~15% to 8.93 from 7.75, and 19% in Brazil where the free-shipping threshold was cut. The daily-to-monthly active user ratio hit an all-time high. Users engaging with BOTH the marketplace and Mercado Pago grew 37% - they generate 70% more GMV, 55% more items, nearly 90% more payment volume per user. Advertising grew 62% FX-neutral and passed 10% of the whole LatAm digital ad market. AUM $23B, up 68%. Active sellers up 29%. That is what the spending buys - the question is whether it converts to margin. What to watch: UP: a September quarter with operating margin back above 9%, a provision line growing slower than revenue, or credit-card net interest margin back to breakeven. BEAR: a Q3 below 6.5% operating margin, gross margin under 40%, or the 15-90 day non-performing ratio breaking above 6% as the 2026 card cohorts season. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.