MELI is undervalued; DCF fair value $2,253 vs price $1,966, driven by revenue growth and macro tailwinds offsetting margin pressure.

Mercado Libre reached an important milestone surpassing $10 billion in revenue representing 50% year-over-year growth in its most recently completed quarter. Management recently implemented a new strategy lowering the threshold for free shipping adding convenience to consumers.

So when Mercado Libre started this strategy, I was optimistic that it would be successful because of what I've seen from Amazon and so far it has been successful with revenue increasing meaningfully.

That being said, does this make Mercado Libre stock a buying opportunity? So Mercado Libre surpassed $10 billion in quarterly revenue which was up 50% trailing 12 month it reported $35 billion in revenue and you can see the phenomenal growth in the company's history.

This company just 10 years ago was generating around $1 billion in revenue and now it's up over 35 billion. E-commerce is just one part of its business profile. It also operates a financial services and lending segment where its loan portfolio increased by 75% year-over-year but the management team said they're maintaining credit quality and default rates are consistent with historical averages.

The lower shipping threshold should continue to bring more customers and spend per buyer increasing as the company makes it more convenient for consumers. But of course, anytime a company implements a incentive program, promotion program, discount, etc. to make purchasing more convenient, more accessible, more affordable, I always want to look at the profitability, how it's impacting profits and profit margins.

And there is a noticeable decline in the company's operating profitability, which has roughly fallen by half. Its operating profit margin was around 16% in 2023, and that's fallen to 8 and 1/4% as of the most recent update.

Now, as the company densifies its network, the impact to its profitability of the lower shipping threshold should diminish. That's because if Mercado Libre is already making a delivery to a neighborhood, and then another customer makes a purchase in that same neighborhood, the cost per delivery decreases.

And that benefit expands as the company densifies the network further, as I've seen from Amazon, which has lowered their cost to serve customers meaningfully, and their operating profit margins are approaching 15%.

Similarly, Mercado Libre's return on invested capital, after several years of improvement, has trended downward. At 8.6%, it's also about half where it was in 2025.

So, the balance here is something that needs to be monitored continuously. And this is something I'm sure management is watching.

The offset, right? How many new customers are we getting, and how much more revenue are we generating as a result of this new policy versus how much is it costing on the bottom line overall? Is it worth it for us to continue this policy?

And according to the management team from what they've seen so far, they told investors that they like what they're seeing. They like the return on this strategy and they're going to continue this disciplined strategy of lowering shipping threshold and allowing more convenience by offering free shipping on a lower total purchase amount.

The valuation is also near its lowest levels in years. Mercado Libre is trading at a forward price to earnings of 34.6, which is near the lowest you've been able to buy this stock going back several years.

Now, Mercado Libre is operating in a part of the world, the Latin American economy, which is growing faster than the United States economy. That's because it's not as far along in development and so when countries are still in the earlier stages of development, their growth rates can be faster than more developed economies like the United States.

So, you've got a business that's operating in an industry that's growing because it's adding more convenience and brick-and-mortar businesses can't compete with the convenience of online shopping.

So, it's in an industry that's capturing a tailwind in a country that's growing faster than developed countries and so you've got a powerful tailwind for top-line growth for Mercado Libre.

I also updated my discounted cash flow valuation for Mercado Libre. I revised higher my estimates for how much free cash flow I expect this business will generate and my fair value estimate came to $2,253 per share compared to the current market price of $1,966. The stock still looks undervalued.