Every now and then I get emails from a web blogger who goes by the pen name Deep Throat reminding me of the accounting irregularities at Alibaba Group Holding Ltd (NYSE:BABA), implying that BABA stock is a shady stock to buy.
In fact, none of messages are reflect positively on the Alibaba stock price.
Ever since Herb Greenberg and Jim Chanos started fishing around Alibaba’s financial statements back in 2016, the additional risk presented by investing in BABA stock relative to Amazon.com, Inc. (NASDAQ:AMZN) became real. When the U.S. Securities and Exchange Commission started investigating Alibaba’s accounting practices in 2016 — an investigation that’s still ongoing — the risk factor ramped up exponentially.
I’ve been a cheerleader of Jack Ma’s for a while now, so I’m not ready to jump off the bandwagon, but now whenever I see or hear from an Alibaba skeptic like Greenberg suggesting BABA stock is a dangerous trade, my ears perk up because where there’s smoke, there’s usually fire.
In my most recent article about Alibaba, I recommended three things it should do in the next 12 months. One of them was to buy Mercadolibre Inc (NASDAQ:MELI), its Latin American equivalent in the world of e-commerce intermediaries.
Deep Throat’s latest comments have me thinking about the relative merits of investing in BABA stock versus other e-commerce alternatives including MELI, which is a much more apples-to-apples comparison than Amazon, at least when it comes to online retail because Amazon owns much of its inventory; Alibaba and Mercadolibre don’t.
BABA’s Gross Merchandise Volume
In the most recent 12 months ended March 31, 2017, Alibaba’s total GMV was $547 billion. Meanwhile, Mercadolibre’s GMV for the 12 months ended December 31, 2016, was $8 billion or less than 2% of Alibaba’s GMV, and growing at 12.6% year-over-year, 920 basis points less than Alibaba.
On a per-share basis that works out to $223.36 for BABA and $181 for MELI. However, if you divide Mercadolibre’s 2016 GMV of $8.0 billion by its 2016 revenue of $844.4 million, you get 10.6%. If you do the same with Alibaba — $565.1 billion divided by $17.2 billion — you get 3% or one-third the revenue sold through its various e-commerce sites.
More importantly, as far as I know, Mercadolibre doesn’t have any accounting issues that have caught the attention of the SEC.
Valuation of the Two Stocks
Given the skeptics’ suspicions about Alibaba’s real revenues and profits, it’s hard to know what valuation metrics to use to compare the two stocks.
On a price-to-sales basis, MELI’s current multiple is 10.6 or 60% less than Alibaba while its price-to-cash flow is 30.7, about 5% less than Alibaba’s at 32.2.
However, with all the additional businesses that Alibaba owns, including a growing cloud segment, I’m not sure these comparisons are significant.
What I do know is that Mercadolibre’s revenues have grown every year over the last decade from $85 million in 2007 to $844 million in 2016, a compound annual growth rate of 29.1%. On the bottom line, MELI has grown its operating income by 26.4% annually over the past decade.
As the South American economy continues to mature and grow, an investment in MELI will likely deliver significant long-term capital appreciation without the same level of risk associated with Alibaba.
Bottom Line on BABA Stock
I tend to side with the analysts who see Alibaba as being a legitimate investment with a very complex business model that ultimately won’t turn out to be another Enron. So, for me, BABA stock is still a buy.
That said, if you want a good e-commerce investment that captures a growing emerging market with less risk, MELI is the play over BABA.
Not to mention if Alibaba did buy MELI in the future as I’ve suggested, you’ll benefit from BABA stock indirectly anyway.
MELI just might be the more conservative play on emerging markets and e-commerce.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
