Let's see if you've heard this one before. There is this great Internet company that runs a thriving online auction business, and it also has a fast-growing payments business. The company benefits from the network effect every time a user signs up, and the total volume of merchandise and payments are growing at a fast pace. If this sounds like eBay (NASDAQ: EBAY) and you like the business, I would suggest that Mercadolibre (NASDAQ: MELI) deserves your attention today.
What makes eBay great?
There are few people online that don't know about eBay. Along with Amazon.com (NASDAQ: AMZN), you could make the argument that if customers want to buy something, these are the first two sites they visit.
EBay has been growing its Marketplace business for years. While Mercadolibre is earlier in the adoption phase of online auctions, this is a positive for the company over the long-term. Imagine being able to buy eBay during its fast-growth phase at a reasonable price relative to its growth rate. Investors are being given exactly that chance with Mercadolibre.
The second thing that makes eBay great is the company's PayPal division. With payment volumes up 25% in the current quarter, PayPal keeps chugging along. Some would argue that this is a unique advantage of buying eBay versus Amazon's stock. If you like PayPal, check out Mercadolibre's MercadoPago business. While PayPal makes up nearly half of eBay's revenues, the MercadoPago business represents just over 25% of Mercadolibre's revenues.
A younger version of eBay with the growth to prove it
Buying stock in an international company requires patience and the ability to look at organic growth rather than just the reported numbers. Since Mercadolibre gets most of its sales from the Latin American region, the company's organic growth can be muted by currency changes.
For example, Mercadolibre reported revenue increased 27% in U.S. dollars in the last three months. This seems to be just slightly faster than the 24% sales increase at Amazon, and looks much better than eBay's 14% sales increase. If you exclude currency changes, however, the numbers change dramatically. In local currencies, Mercadolibre actually grew sales by 45%.
This disconnect also applies to the company's MercadoPago business as well. Compared to PayPal's revenue growth of 19%, MercadoPago already looks good with a 34% increase in U.S. dollars. However, if we exclude currency changes, this division reported organic growth of 55%. Though currency changes lowered the company's U.S. dollar results, it's clear that Mercadolibre is growing faster than either eBay or Amazon.
Better margins too!
One of the attractions investors have to eBay is the company's unique business model. EBay's Marketplace business connects buyers and sellers, and yet eBay carries no real inventory risk. This is completely different from Amazon, which has to deal with significant inventory.
In addition, eBay doesn't need to build huge new warehouses like Amazon because the fulfillment of orders are handled by sellers and not the company. All of these positive attributes also apply to Mercadolibre as well.
There might not be a better way to compare the inventory risk at Amazon to the lack of inventory at eBay and Mercadolibre than to look at each company's operating margin. Amazon has struggled to maintain a 1% operating margin. In the last three full years, Amazon's operating margin has declined sequentially though its sales have increased .
By comparison, eBay managed a near 27% operating margin in the current quarter. Mercadolibre did even better with a more than 30% margin. The company is growing sales faster and has a better margin, so what could go wrong?
One worry offset by a decent value
Besides the obvious currency challenges, the biggest worry facing Mercadolibre is execution risk. The company is growing fast, but it must maintain the right balance between inviting sellers to list items and helping buyers trust that they will get what they pay for. EBay has changed buying and selling policies many times over the years, and sometimes these changes have angered buyers, sellers, or both.
That being said, it's hard to ignore the potential value of the Mercadolibre business. Today the stock sells for a forward P/E of about 33, but analysts expect EPS growth in the next five years of nearly 29%. By comparison, eBay is cheaper but is expected to grow its earnings by about half of this rate. Amazon is expected to grow earnings slightly faster than Mercadolibre, but sells for a forward P/E that is more than three times higher.
Mercadolibre literally means "free market ," and if the company can navigate the Latin American free market successfully then investors may be in for the ride of their life. Add MELI to your personalized Watchlist today. It's pretty clear that Mercadolibre could be a great opportunity, and the business model makes sense in any language.
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