Introducing the Quality Score: Mercado Libre Breakdown (Free Example, Premium Valuation)
A new framework to assess quality businesses based on your feedback—free preview with Mercado Libre, full valuation reserved for premium subscribers.
Hey everyone,
One of the most requested features from subscribers has been a structured scorecard to evaluate companies at a glance. I’ve taken this feedback and developed the Quality Score, a framework that breaks down businesses across 13 key categories to assess their long-term strength.
To introduce this new format, I’m sharing a free example featuring Mercado Libre—one of my longest-held investments. You’ll see how I rate the company across various factors, from competitive advantages to financial durability and growth expectations.
However, going forward, most Quality Score reports will be paywalled, with the majority of the 13 score categories and a detailed valuation discussion available exclusively for premium subscribers. If you’re serious about investing in high-quality companies, upgrading will give you full access to these insights.
🔹 What do you think? At the end of the post, you’ll find a quick poll—your feedback will help shape this format moving forward.
🔹 Limited-Time Offer: If you’d like full access to future Quality Score reports and my premium insights, upgrade today and get 15% off your first year!
Let’s dive into Mercado Libre’s Quality Score—and if you’re a premium subscriber, you’ll also get my in-depth valuation breakdown. Check out this post if you want more details about the quality score.
Let’s dive in!
A short introduction to the company
Mercado Libre is an E-commerce and fintech ecosystem founded and based in Uruguay in the LATAM region. The founder-led company dominates the markets in key countries like Mexico, Brazil and Argentina and is constantly investing in its ecosystem with a long-term investment horizon. Over the years the company expanded into key areas like logistics, advertising, credit and payments outside of their marketplace.
Management Alignment (5/5)
MELI is founder-led and Marcos Galperin still owns around 7% of the shares through his trust. Management is compensated in the short term based on operating income (35%), revenue (40%), TPV (stands for Total Payment Volume; 10%) and NPS (stands for Net Promoter Score and measures how likely customers are to recommend the platform; 15%) plus personal performance multiplier. Long-term compensation is tied to shares with a vesting schedule of 6 years. This is a wonderful example of an aligned business: high insider ownership, short-term compensation tied to operational growth, but also quality factors like NPS and a long vesting period for bonus shares.
Secular Trends (3/3)
MELI benefits from several tailwinds, such as low e-commerce penetration, overall economic growth prospects in LATAM and the large unbanked population. This has led and will continue to lead to strong growth rates. I talked more about these tailwinds in my recent Nu Holdings post.
Margins (3/5)
Gross and operating margins have compressed for a while. In the late 2010s, management decided to reinvest more aggressively into long-term growth instead of milking its existing high-margin business. This resulted in strong compression of margins. While they have rebounded very strongly, they aren’t stable and pretty lumpy. Mercado Libre doesn’t optimize for short-term margins, so it will continue to be volatile but in an uptrend.
Balance Sheet (2/3)
MELI has moderate leverage at 0.6x net debt/adjusted EBITDA. This is measured based on available cash and investments: due to its fintech and credit business, the company has customer funds, which I won’t count towards its balance sheet.
Moat/Competition (4/5)
Mercado Libre has multiple competitive advantages:
Market leader in E-commerce - strong network effect as the leading marketplace. Sellers and buyers want to be on the platform for the highest selection of goods.
Vertical integration with logistics - its unique logistics network is a strong advantage in a tough environment like LATAM. It is very hard to replicate with the political instability in many LATAM subregions, especially for foreign companies.
Cross-selling - MELI can cross-sell customers between its E-commerce and Fintech businesses. This helps with customer acquisition and retention. Introducing new products can further increase stickiness and growth.
While Mercado Libre has a very strong advantage, there is certainly fierce competition, especially in the Fintech business, where they are not the market leader and have strong competition from traditional banks like Santander and Neobanks like Nu or Inter. Regardless, I believe that Mercado Libre should score high, particularly because the cross-selling effect between business segments makes customer relationships sticky.
Past growth (3/3)
Past growth has been exceptional, with a 5-year revenue CAGR of 56%. In 2024 reported revenue growth decelerated to 43%, while FX-neutral growth was at a strong 101%.
Expected growth (5/5)
Analysts expect reported revenue growth of 23.7%, 21.9% and 18.5% for the next three years. I believe that MELI could even top that, as they love to beat expectations and surprise with introducing new services into its ecosystem funnel.
I typically award points as follows:
low-single digits revenue growth
mid-single digits revenue growth
high-single digits revenue growth
double-digit revenue growth
high teens revenue growth
ROIC (5/5)
MELI has scaled its ROIC to 32% on a NOPAT and 60% on an owner-earning basis. Profits are growing much faster than invested capital, so I expect this to continue to increase.
Reinvestment rate (4/5)
Mercado Libre reinvests 20% of owner earnings back into CapEx and 45% into R&D. Additionally, capital is used to grow its fintech business. I love the combination of a business able to reinvest a lot of capital at a high ROIC.
Capital Return (1/3)
MELI repurchases some shares to offset SBC, but over the last few years, its share count has increased. It does not pay a dividend currently but did so until 2018 when it accelerated reinvestment into the business. With its strong cash generation and balance sheet MELI now should do a small return of capital.
Cyclicality/visibility (3/5)
E-commerce and payments depend on consumer spending, so there is an inherent cyclicality. However, the business itself has good visibility. Outside of general macroeconomic downturns, consumer spending always happens and provides consistent revenues for Mercado Libre.
Recurring revenue (4/5)
Recurring revenue has a similar reasoning to cyclicality: Consumer spending is always happening and customers come back to do their shopping on Mercado Libre and pay their bills via Mercado Pago. You could call it reoccurring revenue instead.
Working capital management (3/3)
While net working capital has been volatile and increased sharply in recent years due to investments in the credit business, it still is a very manageable $2.9 billion right now. The cash conversion cycle, however, is very negative (-60 days) and has declined every of the last three years. This means that Mercado Libre can fund its investments with customer funds by paying them 60 days later.
Here is my Quality dashboard for Mercado Libre with a summary and comparison against my average portfolio. This also gives you a glimpse into my IRR for Mercado Libre and the portfolio. I hope you liked this free preview of my new format. Now, let’s get into the valuation discussion; I intentionally try to separate quality from valuation.
Let’s talk valuation
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