Both MercadoLibre (NASDAQ:MELI) and Facebook (NASDAQ:FB) have delivered impressive returns to investors over the last five years. Shares of MercadoLibre have soared by 447%, handily beating Facebook's return of 146%, while both stocks have trounced the 46% return of the S&P 500 index.
MercadoLibre operates the largest e-commerce platform in Latin America. The company is seeing explosive growth with its mobile payments business as more and more people throughout the region embrace online shopping. Facebook, meanwhile, has a wide moat thanks to its massive user base, but privacy issues have forced management to spend billions to change how its social media platforms operate. The spending has knocked down profits in the short term, but advertisers are still spending money, which has pushed the stock up 39% this year.
Let's compare the stocks to find out which one investors should buy today.
The MercadoLibre case
As of the last quarter, MercadoLibre had 292.5 million registered users out of a region with a population of 644 million. It's clearly got a long way to go before growth slows down.
However, while the marketplace business continues to grow, investors are more excited about the company's expanding fintech platform. The MercadoPago payments business is rapidly gaining momentum. In the last quarter, total payment volume (TPV) grew 90% on a constant-currency basis.
What's most impressive is growth in payments made outside of Mercado's marketplace business. Mobile point-of-sale payment volume was up triple digits in Brazil, Argentina, and Mexico last quarter, the company's three largest markets by revenue. Additionally, digital wallet TPV was up an astronomical 419% year over year excluding currency changes.
The stock price has basically moved higher on the strength of top-line momentum -- total revenue was up 102% in local currency last quarter. MercadoLibre is light on profitability right now as management invests in technology and its fintech initiatives, and this makes the stock difficult to value. However, the company is making progress on the bottom line, turning its year-ago net loss into a profit of $16.2 million last quarter. Analysts expect earnings to nearly double in 2020 to $2.22 per share. But that still leaves the stock trading at a very high valuation of 239 times next year's earnings estimate.
The Facebook case
The politicos have their knives out for Facebook. In June the FTC opened an antitrust investigation into the social media giant, and the Department of Justice announced it was opening an antitrust investigation into all market-leading online platforms. This news comes after Facebook recently agreed to pay a fine of $5 billion to settle with the FTC over privacy concerns.
Despite the increasing scrutiny, Facebook is still an enormously valuable business. It has 2.7 billion users spread across its various social media platforms, such as Facebook, Instagram, WhatsApp, and Messenger, and that enormous user base continues to attract advertisers.
In the most recent quarter, revenue climbed 28% year over year. Advertisers continue to spend money on Facebook because users are remaining engaged: Both daily active users and monthly active users were up 8% last quarter.
The only drawback has been the slump in profits as the company addresses privacy concerns. Higher spending took its toll on the company's operating margin, which was 27% last quarter, down from 44% in the year-ago quarter.
Analysts expect earnings to be $6.36 per share this year, but earnings are expected to rebound to $9.51 next year, reflecting the expectation that the slump in profitability is temporary and will reverse itself once the company gets through the near-term spending cycle.
Looking further out, management is excited about new growth opportunities, including the integration of commerce and payments across Facebook's platforms, which could be a very lucrative endeavor. One analyst has estimated that the "checkout with Instagram" feature could add $10 billion to Facebook's revenue by 2021.
Payments and commerce will be just the beginning of Facebook's ambitions to make its impact on the world of finance. The social networking giant recently announced a collaboration with 27 other organizations to work on a new cryptocurrency called Libra, which is another moonshot opportunity to go along with the company's investments in augmented and virtual reality.
Libra has given people even more reason to scrutinize Facebook, so it's unclear whether it will ever amount to anything. But the main takeaway for investors is that Facebook is continuing to look for ways to leverage its massive user base, currently about one-third of the world's population and still growing. The powerful network effect is the main reason why Facebook is a stock worth considering.
Which is the better buy?
Before I declare which is the better buy, let's first check the two stocks' valuations. MercadoLibre is growing much faster, but it's more expensive, as you can see in this table:
|Market capitalization||$30.3 billion||$517 billion|
|Price/free cash flow||168.1||29.3|
It's difficult to recommend MercadoLibre stock after such a fast rise this year. MercadoLibre has a long growth runway given that e-commerce sales make up only 4.2% of total retail sales in Latin America. That's less than half the penetration rate of the U.S. But I would wait for the stock to cool off a bit before diving in.
In the meantime, Facebook offers good growth prospects at a relatively low valuation. I would buy Facebook for now and keep MercadoLibre on your watch list.