My editor asked me to write an article about PayPal (NASDAQ:PYPL) stock. Being the end of the week and all, I thought I’d throw him a curve ball.
As I was thinking about what I’d like to say about PayPal stock, positive or negative, I came across a Feb. 27 story by Bloomberg contributor Carolina Millan that discussed why analysts think Latin American e-commerce giant MercadoLibre (NASDAQ:MELI) could become the next PayPal.
It caught my interest for two reasons:
First, I’m a big fan of Latin American businesses. Most investors think of Central and South America as a collection of third-world, second-rate countries. Venezuela doesn’t help. However, I believe there’s a lot of potential for investors willing to travel down a slightly different road. Here’s something I wrote way back in 2012 — despite all the political and economic flare-ups that have taken place between then and now, I’m a bigger fan today than I’ve ever been.
The second reason the article caught my interest is that I’ve recommended MercadoLibre stock on several occasions in the past. First in May 2013; most recently this past September. I’ve always liked the fact it doesn’t own any inventory that’s sold on its e-commerce platform, unlike Amazon (NASDAQ:AMZN).
So, the fact that MercadoLibre is taking a page out of the PayPal playbook is significant. Here are two reasons why.
The Elephant in the Room
For years the media had speculated about when Amazon was going to conquer Latin America.
“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 [MercadoLibre] as online penetration increases,” I wrote in 2013. “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.”
Fast forward to 2018 and people continue to speculate about Amazon’s plans for Latin America. In 2017, it began selling electronics and appliances, and in 2018 it went even further and is now selling apparel. Amazon claims it will have more than 300,000 items available to its Brazil customers.
While I do see Amazon as a real competitive threat to MercadoLibre, Latin Americans are so familiar with the MercadoLibre name; it will take years for Jeff Bezos and company to break the company’s hold on e-commerce in the region.
And that’s saying something because I believe in the Amazon business model.
When Cornered, Fight Back
All businesses face competition. You shouldn’t be in business if you’re afraid of your competitors. MercadoLibre, as far as I can tell, don’t fear Amazon but do respect it.
“Our way of competing successfully is to look at all the players, see what they have that we think is great, and if we can incorporate that into our model, we will, but mostly play our game,” MercadoLibre CEO Marcos Galperin said last July at Allen & Co.’s Sun Valley conference. “We try to play our game and use our advantages and our strengths. We have a great network of sellers, a great brand, we’re investing very heavily, we already have scale.”
PayPal has made several acquisitions in recent years including Venmo and iZettle to diversify its revenue streams beyond its online payment platform, which is accepted by 82% of the top 500 U.S. internet retailers and represents 85% of the company’s overall revenue.
MercadoLibre is looking to diversify beyond e-commerce retail by growing MercadoPago, its payments business.
In the fourth quarter, MercadoPago processed more than $2 billion in third-party, off-platform (online and offline) payments generating almost 70 million transactions. Mobile point-of-sale devices were a big part of that off-platform payment volume accounting for nearly half the 70 million.
In fiscal 2018, MercadoLibre’s Non-Marketplace revenue, which includes MercadoPago, exceeded its Enhanced Marketplace revenue — the fees it gets for sales on its e-commerce platform — for the first time in its history. In 2017, its Non-Enhanced revenue accounted for 39% of its overall revenue. Today, it’s 51% of sales.
The Bottom Line on MELI and PYPL Stock
Since PayPal was separated from eBay (NASDAQ:EBAY) in July 2015, PayPal stock has appreciated by 155% compared to 37% for its former parent. I don’t think there’s any question that PayPal stock will continue to outperform eBay in the years ahead.
Analysts expect PayPal revenue to grow 22.2% annually over the next five years. With the acquisitions it’s made to broaden its horizons in the online payment industry, I don’t think there’s any doubt PYPL stock will keep moving higher.
As for MercadoLibre, I continue to like its business. If you can afford to, I’d buy both.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
