MercadoLibre (NASDAQ:MELI) jumped almost 18% on Tuesday thanks to a solid first quarter earnings report, although it lost some of those gains today.
Amazon is of course a powerhouse but, considering that Latin America is one of the best, if not the best, investment opportunities anywhere in the world at the moment, it’s actually a close race for which is the better buy.
Before I get into the pros and cons of each stock, though, it’s important to understand how each company makes money. See, in the first quarter, Amazon’s gross margin was 27% compared to 72% for MercadoLibre.
Such a huge discrepancy actually makes sense though, as Amazon is a retailer while MercadoLibre is an e-commerce platform much like eBay, which owns 18% of its stock. Although both are providing a service, only Amazon actually owns inventory.
It’s only natural then that MELI’s margins would be much higher. In fact, eBay is a much better comparison, sporting gross margins 290 basis points lower than its Latin American partner during the same time period.
A more appropriate comparison of AMZN and MELI is revenue growth. MercadoLibre’s revenue has a compound annual growth rate of 34% since 2007, while Amazon’s CAGR is 32% over the same period. In the first leg, this is a pretty close race.
Still, the nod for growth has to go to MELI. In the first quarter, MELI’s revenue in constant currency grew 36% year-over-year to $102.7 million,with Argentina leading the charge with a 63% increase in revenue. While Brazil still represents 47% of overall revenue, Argentina’s growth puts it in a strong second ahead of businesses in Mexico, Venezuela and elsewhere.
Plus, MercadoLibre suggests it’s just scratched the surface of the Latin American market. According to the World Bank, only 33% of the Latin American population is online, which pales in comparison to the rest of the world. And of those people that are online, only 25% — or 49 million — are registered on MercadoLibre.
So only 10% of the online population is actually shopping, leaving 135 million Latin Americans currently online but not buying anything. That presents a huge opportunity for the company as online penetration increases.
Of course, Amazon sees such opportunity too. Last year, it opened an e-commerce site in Brazil that focuses on e-books. Some wonder if this is the precursor to broadening its offerings in the largest country in Latin America.
While that’s hard to predict, we do know that Linio, considered by many to be the “Amazon of Latin America,” received upwards of $50 million in additional investments in February in order to further its growth in Colombia, Mexico, Peru and Venezuela. The site was only launched in the spring of 2012 and this recent cash raise could be the shot across the bow Amazon requires in order to make a bigger commitment in Latin America.
Still, the problem with increased Latin American participation for Amazon is that its international business isn’t exactly lighting the house on fire. In the first quarter, international revenues grew 16% year-over-year to $6.7 billion, representing 42% of its overall revenue.
Unfortunately, it had an operating loss of $16 million compared to a profit of $49 million in Q1 2012. And with Linio making inroads into Latin America, it’s going to be tough for Amazon to build a profitable business down there.
To add to MercadoLibre’s lead, the company has also seriously outperformed both Amazon and eBay over the last three years. Year-to-date MELI is up almost 50% compared to gains of 4% and 7% for Amazon and eBay respectively. There’s no question which horse is out in front.
Investors also want to ask themselves how much risk is attached to each stock. MercadoLibre’s biggest risk in my opinion is Venezuela. In Q1, it lost $6.4 million from the devaluation of the Bolivar. That’s a 27% haircut on its earnings per share. If that keeps up, investors aren’t going to find its stock nearly as attractive.
Amazon’s biggest risk, on the other hand, is that it’s already shown an inability to profitably grow its business outside the U.S. Sure, Latin America is a very tempting e-commerce marketplace that’s still very much in its infancy, but it’s also a very different place to do business.
I’m not suggesting for a moment that Jeff Bezos won’t succeed in Latin America like he has elsewhere; it’s just that his free-cash-flow-before-profits modus operandi will someday come home to bite it in the posterior. I get that it’s the world’s biggest grocery store surviving on volume and not margins, but the last time I checked, grocery stores have been known to go out of business occasionally.
All in all, there’s no question that Amazon’s a great company. However, when it comes to which is the better stock to buy, I have to go with MercadoLibre. It has a dominant position in a growing market and looks appealing despite the healthy gains it’s already made in 2013.
If you can buy it below $100, even better.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.