Facebook's world domination -- outside of possibly only China -- is unquestioned. The combination of its namesake service -- plus Instagram and WhatsApp -- make for a social media company the likes of which can't be matched.
But it has run into troubles. And if you're considering investing in international growth, there are other companies to consider. Like, for instance, Latin America's e-commerce leader, MercadoLibre.
Between these two, which is the better stock to buy?
We can't answer that question with total certainty. But we can compare the two on three crucial criteria to see which we're more comfortable putting our money behind.
As the past few months have shown, the stock market won't always go up in a straight line. And anyone who was investing a decade ago knows the economy can come to a grinding halt at any time.
What we want to know is whether or not a company will be hurt -- or helped -- when those times come. We learn that by evaluating their financial fortitude. Keeping in mind that Facebook is valued at nearly 30 times the size of MercadoLibre, here's how they stack up:
|Company||Cash||Debt||Free Cash Flow|
|MercadoLibre (NASDAQ:MELI)||$1.1 billion||$555 million||$130 million|
|Facebook (NASDAQ:FB)||$41.2 billion||$0||$17.5 billion|
It's crystal clear that Facebook is in better position to benefit from economic shocks. While the stock may decline with the rest of the market, the company could use its war chest to -- for example -- buy back shares at a significant discount.
MercadoLibre, on the other hand, would be hard-pressed to continue pursuing market share. It would instead need to cut back on spending to shore up its free cash flow and meet debt obligations.
Next, we have valuation. There's no single metric that can tell us which stock is cheaper, so I like to consult a number of different ones to build out a fuller picture.
|Company||P/E Ratio||P/FCF Ratio||P/S Ratio||PEG Ratio|
Here, again, Facebook comes out ahead. On one hand, this is a very tough comparison. MercadoLibre is spending lots of money right now to build out its fulfillment network. That's a great long-term move in fending off encroachment from Walmart and Amazon, but it also means that the stock's ratios are sky-high.
Facebook, on the other hand, is trading for very cheap prices. Some of that is expected after the stock's five-year run-up -- and its fair share of bad news regarding data breaches. But earnings are expected to grow at nearly 20% between 2019 and 2021, making today's prices appear more than fair.
Sustainable competitive advantages
Finally, we have what I consider the most important area to investigate -- the width of a company's moat, or its sustainable competitive advantages.
Facebook's moat is a textbook case of the network effect. No one would want to use a social network if their friends weren't on it. With each new user, nonusers are incentivized to join -- which makes it even more appealing to other nonusers. Therefore, it's tough for the competition to put a dent in Facebook...or Instagram...or WhatsApp. Last quarter, Facebook announced that 2.6 billion people -- or one-third of all humans -- use one of Facebook's properties on a monthly basis.
MercadoLibre has lots of moving parts to its moat. It also benefits from the network effect, as more people visiting the platform to buy stuff means more merchants listing their wares on MercadoLibre. And that virtuous cycle is still in action: Registered users grew 24% last quarter to 249 million.
But that's not all: MercadoPago -- the company's PayPal-esque offering that's helping many of the region's unbanked consumers get access to digital payments -- has exploded in popularity. Payment transactions jumped 67% last quarter.
And, as mentioned above, MercadoLibre is spending hand over fist to build out its fulfillment capabilities and offer subsidized shipping to customers. The initiative is dubbed MercadoEnvios.
Right now, such an investment is the right move, as it will lower the internal costs for such deliveries relative to the competition. But it's still early -- it's tough to tell how hard Walmart and/or Amazon will go after these markets. They have both have deeper pockets, and could neutralize this advantage if they wanted to.
Given those dynamics, I'm calling this a draw.
And my winner is...
So there you have it: While I actually think MercadoLibre has the potential to have the stronger long-term moat, Facebook's network effect is formidable, and both its balance sheet and valuation are superior.
But don't be steered away from MercadoLibre, either. In reality, I own shares of both companies -- combined, the make up 12% of my real-life holdings. They both deserve your attention, but right now, Facebook appears to be the better buy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brian Stoffel owns shares of AMZN, Facebook, and MercadoLibre. The Motley Fool owns shares of and recommends AMZN, Facebook, MercadoLibre, and PYPL. The Motley Fool has the following options: short January 2019 $82 calls on PYPL. The Motley Fool has a disclosure policy.