Better Buy: MercadoLibre vs. Amazon

Shoppers chose to buy more gifts online in 2020 than in any other holiday season in the past. It's likely consumers wanted to avoid crowded brick-and-mortar stores where masks were required for entry. This played to the sweet spots of two e-commerce leaders: retail giant Amazon (AMZN -1.65%) and Latin America's largest online retailer, MercadoLibre (MELI -0.45%). It's likely that this duo will post their biggest-ever results when they report earnings from the holiday quarter. Given these two are on a roll, let's see which would be a better buy today. But first, let's check out how these businesses compare side-by-side. 

By the numbers

Amazon's five-year head start on MercadoLibre and its faster growth has put the e-commerce juggernaut into the select $1 trillion-plus market capitalization club. Even with its size, it's still posting amazing growth numbers.

Data source: Company earnings reports and Yahoo! Finance. MRQ = most recent quarter. YOY = year over year. 

More recently, MercadoLibre is putting up faster top-line growth, which is not surprising given its revenue is about 1% of its larger rival. Amazon has built a substantial business outside of its home market plus a leading cloud service that could be a Fortune 500 company on its own. But Mercado Pago, the Latin American payments and fintech platform, shouldn't be counted out. It's growing like crazy and has significant traction in both online and offline payments.

Adding it all up, the resulting market capitalization of Amazon is more than 160 times larger than its Latin American competitor. Let's look at why even with this gigantic market cap, Amazon could be a winning stock from here. 

The case for Amazon

The coronavirus has been a boon for e-commerce, and Amazon has certainly benefited. Its Q3 2020 e-commerce growth accelerated to 39% year over year, up from 22% the same quarter a year ago. Even with these incredible results, the overall share of e-commerce sales in the U.S. in Q3 was a meager 14.3%. Many consumers have "discovered" the online retailer's massive selection of products and fast delivery in the last few months, but there's still plenty of room for its online shopping segment to grow even more.

In addition to e-commerce, Amazon's cloud computing segment is an important contributor to the company's top and bottom lines. With its 29% year-over-year revenue growth last quarter, Amazon Web Services (AWS) generated $3.5 billion in operating income. This represented 57% of the total operating income for the company. With the tailwinds of cloud adoption, this segment will continue to generate meaningful growth and profits for years to come.

Let's see what the case is for its tiny-by-comparison competitor from Latin America.

Image source: Getty Images.

The case for MercadoLibre

MercadoLibre has been building a substantial business in Latin America since 1999. Its online marketplace serves 18 countries across the region, but 95% of revenue comes from only three: Brazil, Argentina, and Mexico. The other 15 countries shouldn't be underestimated. They have a population of 256 million and over 100 million internet users, and the company is making moves to capitalize. It's starting to expand its physical infrastructure and payments capabilities in these countries to drive growth for the next decade and beyond.

In addition to a massive e-commerce opportunity, its fintech business is experiencing significant growth. Last quarter, the company processed $14.5 billion in payments, with 60% of those being off-platform transactions at local stores. But the company has grand designs for more than just payments. It's striving to be a "disruptive provider of end-to-end financial technology solutions," and it's well on its way. With services such as money market funds, peer-to-peer digital payments, and even payments via QR codes, Mercado Pago is making strides to help create "financial inclusion" for the unbanked and underbanked population.

The winner for investors

Our discussion is not complete without mentioning the relative valuations of these two stocks. Since I wrote about these two a year ago, both have become more "expensive" when you look at valuations. 

Data source: YCharts.

It's not surprising that the smaller, faster-growing company seems more pricey, but I think it's still worth this lofty multiple.

I wouldn't fault anyone for buying Amazon today. In fact, I still think this superior operator can continue to beat the market for the foreseeable future.

But I'm sticking with the winner from this head-to-head match-up I picked last year: MercadoLibre. Its smaller size, higher growth profile, and massive market for both e-commerce and fintech give it the edge. MercadoLibre is the better buy today for patient investors with a long-term perspective.