Mercado Libre’s Downgrade by JP Morgan

Shares of Mercado Libre (BMV:MELIN) (NASDAQ:MELI) fell 2% on Wednesday following a downgrade by JP Morgan. Previously rated as overweight, JP Morgan revised its stance to a more cautious neutral rating.

Reasons for Downgrade

The downgrade is attributed to concerns regarding limited upside potential despite the company’s strong performance over the past year, with a stock rally of 62%.

JP Morgan analysts identified several factors impacting Mercado Libre’s short-term outlook:

Credit Business Pressure

One key issue is the pressure on the company’s credit business, particularly the nascent credit card operations. Although this business is essential for expanding its digital banking ecosystem, it is expected to negatively impact the overall net interest margin.

JP Morgan projects that the Net Interest Margins After Losses (NIMAL) from credit cards may be marginally negative in the early stages, potentially bringing the consolidated NIMAL down from 36% in 2023 to 24% by 2027.

Logistical Expansion Costs

Another challenge is the company’s recent logistical expansion, including the opening of five new distribution centers in the third quarter of 2024. This expansion is expected to increase short-term operational costs, even though its long-term value is recognized.

Tax and Foreign Exchange Concerns

The analysts also expressed concerns about the normalization of the company’s income tax rates and the potential for increasing foreign exchange losses. They noted that an effective tax rate of 20% in the second quarter is not sustainable, projecting rates to hover around 34%.

Moreover, foreign exchange losses, previously minimal, are expected to intensify.

Conclusion

Overall, JP Morgan’s revised outlook indicates that despite Mercado Libre’s long-term potential, the stock may not outperform expectations in the immediate future due to high valuations of 24x EV/EBITDA and 49x P/E for 2025. The brokerage emphasized doubts about further gains without exceeding earnings expectations.