Logistics and marketing erode profit margins, Morgan Stanley lowers MercadoLibre (MELI.US) target price but maintains "Overweight"

Zhitong Finance APP reports that after MercadoLibre (MELI.US), the Latin American e-commerce giant, released its Q3 2026 financial results, Morgan Stanley published a research report outlining six key takeaways. The firm maintained its “Overweight” rating for MercadoLibre but lowered its target price from $2,450 to $2,350, and revised its EBIT forecasts for 2027 and 2028 down by 16% and 14% respectively. This primarily reflects increased logistics and marketing spending, currency headwinds, and a lower-than-expected profit margin in the third quarter.

The report indicates that MercadoLibre’s Q3 EBIT margin contracted by approximately 40 basis points quarter-on-quarter, failing to stabilize as Morgan Stanley previously projected. The bank acknowledged that its earlier tactical judgment regarding a stable sequential margin—suggesting an accelerating profit inflection in 2027—did not materialize, and its short-term confidence in profit visibility has recently decreased. However, it believes the current share price already reflects relatively conservative long-term earnings assumptions and that the valuation provides a long-term margin of safety, thus maintaining the “Overweight” rating.

Logistics costs were one of the main drivers behind the margin pressure this quarter. Morgan Stanley estimates that MercadoLibre’s total shipping costs reached $3.02 billion in Q3, above its forecast of $2.86 billion; 867 million items were sold in the quarter, up 37% year-on-year and about 2% above projections, but unit cost also rose to $3.58 per item, up 9% year-on-year and higher than the forecast of $3.50.

MercadoLibre cited three factors: rising energy prices, logistics network expansion, and a higher proportion of low-ticket items, which together weighed on gross margin by about 100 basis points. Although the third-party platform (3P) take rate climbed about 90 basis points year-on-year to 22.0% and increased about 70 basis points quarter-on-quarter, and shipping fee adjustments had a roughly 60 basis point positive sequential impact on gross margin, net transportation losses still expanded to about $1.28 billion, representing -5.6% of GMV—a year-on-year expansion of 40 basis points and quarter-on-quarter expansion of 30 points. The Brazil shipping rate table was updated at the end of August and will fully benefit Q4; Argentina’s MELI+ expansion was promoted in September and will also reflect a full quarterly impact in Q4.

In terms of marketing investment, MercadoLibre’s Q3 sales and marketing expenses as a percentage of revenue expanded by approximately 50 basis points quarter-on-quarter to 11.6%. The company explicitly mentioned investment in the Brazilian affiliate channel project, and for the first time, its 10-Q filing specifically included “affiliate project” related expenses in the sales and marketing line.

Morgan Stanley estimates that Brazil’s sales and marketing costs rose $267 million year-on-year, higher than Q2’s $226 million; Mexico increased $70 million year-on-year, lower than Q2’s $91 million. The headcount for sales and marketing grew 35% year-on-year, moderating from 40% in Q2, indicating the rise in expenses was not mainly driven by hiring.

Management stated that Q3 sales and marketing expenses remained within the 11%-12% of revenue range seen in recent years. Morgan Stanley believes this aligns with their assessment of the social commerce opportunity, i.e., MercadoLibre can reallocate part of its marketing budget to social and affiliate tools without large step increases in overall spending.

On e-commerce pricing, the report views MercadoLibre’s core commerce business as “highly competitive yet rational.” Q3 self-operated (1P) product gross margin is estimated at 18.6%, up 4 points from Q2’s 14.6%, but still about 1 point below Q1. The reversal of headwinds from inventory restocking in goods and MPOS devices brought around a 30 basis point sequential gross margin tailwind; MPOS losses improved to about $50 million, down from $80 million estimated in Q2, corresponding to around a 22% gross margin for 1P products—at the high end of the recent range.

The core 3P take rate is estimated at 11.3%, flat quarter-on-quarter; it had declined about 80 basis points in Q2 due to lower commissions and PIX discounts in Brazil. Sales tax as a percentage of revenue improved by around 25 basis points quarter-on-quarter, about 30 points better than Morgan Stanley expected; collections and processing fees improved by about 20 basis points, also 20 better than forecast.

In fintech, Mercado Credito’s loan portfolio grew 62% year-on-year and 9% sequentially, though the sequential growth was below the 13% in Q2 and 16% in Q1. The 15-90 day delinquency rate was 7.0%, up 20 basis points year-on-year and stable sequentially; within this, the 15-30 and 31-60 day non-performing rates rose quarter-on-quarter by 20 and 10 basis points, while 61-90 day non-performing fell by 20 basis points.

Restructured loans as a proportion of the portfolio rose to 2.2%, above Q2 2026’s 1.5% and Q3 2025’s 1.7%, reaching the highest level since Q1 2024. The company said this mainly concerned older loans. Q3 NIMAL was about $860 million, up 61% year-on-year and 8% sequentially, with an annualized return rate of 20.1%, below Q2’s 20.7%. Morgan Stanley forecasts NIMAL’s net interest margin to be 21.8% in Q4’s seasonally favorable environment and 18.9% for all of 2027.

Tech and G&A costs continue to show operating leverage. MercadoLibre disclosed that AI investments increased by about $30 million quarter-on-quarter, with hosting fees included in COGS, and tech maintenance and AI costs in product development rising by $72 million year-on-year, below Q2’s $80 million. Product development expenses as a percentage of revenue improved by 80 basis points year-on-year, G&A costs by 10 basis points, though management noted logistics hiring brought a 20 basis point drag. Long-term retention plan expenses, partly tied to the stock price, were $70 million in Q3, up 9% year-on-year, boosting EBIT margin by about 20 basis points.

For earnings projections, Morgan Stanley lowered its 2026 EBIT margin forecast to 6.5% from 7.0%; for 2027, down to 7.2% from 8.2%; for 2028, down to 8.3% from 9.1%. In dollar terms, 2027 and 2028 revenue forecasts were both cut by 6%, reflecting the depreciation of the Mexican peso and Brazilian real after the election.

The bank expects 2027 EBIT to still grow by 35% year-on-year, but this is lower than the previous estimate of around 50% and is based on the revised lower 2026 base. The new price target corresponds to about 17x 2028 EV/EBITDA and about 32x 2028 P/E; DCF assumptions include a 13.5% cost of capital, a 6.5% perpetual growth rate, and a 12.5% terminal EBIT margin. Back-calculations show that the current share price of $1,500 implies a roughly 7.75% perpetual EBIT margin and a 14% revenue CAGR from 2026 to 2036, compared to 48% from 2016 to 2026.

The bank noted that MercadoLibre’s Q3 revenue grew 45% year-on-year, Brazil GMV (at constant FX) rose 36% year-on-year, and the loan portfolio grew 62% year-on-year, showing strong top-line growth. However, until there is greater visibility in profit margins, the market may not value this growth more highly, and this process could last several quarters.

If commission subsidies are further increased or more aggressive competition leads to deteriorating growth improvements, Morgan Stanley may reassess its rating; for now, its channel checks do not support this risk. On risk/reward, Morgan Stanley’s bull, base, and bear scenario price targets are $2,700, $2,350, and $1,150 respectively.