Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: MercadoLibre vs. Alibaba

By Nicholas Rossolillo - Jun 23, 2020 at 11:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

E-commerce is in high-octane mode in emerging markets due to coronavirus.

It's no secret that one of the best investing themes so far in 2020 has been e-commerce. According to the U.S. Census Bureau, online sales are up 16.6% through May compared with 2019 figures, and the Global X E-Commerce ETF is up 28% this year to date compared to a negative 3.5% return for the S&P 500.

The trend is far from over, though. With COVID-19 continuing to wreak havoc on lives and the global economy, e-commerce is more important than ever. And while Amazon continues to command the U.S. front, there are lucrative opportunities in emerging markets in Asia and Latin America. Two that should be at the top of investors' watch list are MercadoLibre (MELI -2.41%) and Alibaba (BABA -1.46%).

But which stock is the better buy at the moment? Let's take a closer look and see.

A young person holding a credit card and smartphone.

Image source: Getty Images.

Fast-growing digital commerce

First, let's be clear that this isn't an apples-to-apples comparison. Up to this point, MercadoLibre is much more hyper-focused on online merchandising with a fast-growing presence in digital payments akin to eBay while Alibaba operates a sprawling ecosystem of tech investments. Though large with a market cap of $48 billion (compared to Alibaba's $583 billion cap), MercadoLibre is the far smaller of the two companies, but it has plenty of upside to tap into in the growing South American economy (which currently still relies heavily on cash and brick-and-mortar retail).  

MercadoLibre is the most popular company for shopping online in Latin America, but it's building on its lead during the current crisis. According to data compiled by Apptopia, e-commerce app downloads surged 43% higher in May 2020 compared to a year ago, and MercadoLibre is far and away in first place in terms of consumer use. Additionally, of the some $2 trillion in retail sales made in Latin America last year, only about 5% of them were made online, according to researcher Statista.

Across the Pacific, e-commerce penetration in China is already one of the highest rates in the world (at some 16% of total retail in 2019, according to Statista). As the second-largest country in terms of retail spending behind the U.S., it's a lucrative market -- one that Alibaba controls nearly one-third of. The tech conglomerate is already a massive enterprise, but it too has plenty of growth ahead. Thus, Alibaba is a bet on both continued growth in digital commerce as well as the continual development of the Chinese middle class.

As the smaller company and with a smaller percentage of its addressable market using its services, MercadoLibre wins in the potential-for-growth department. Revenue increased 38% in Q1 2020 (currency fluctuations against the U.S. dollar dented the currency-neutral growth rate of 71%). And though it funnels most of its profits back into the business to promote expansion, free cash flow (revenue less cash operating and capital expenses) was positive $78 million over the last 12 months. Cash and short-term investments on the balance sheet totaled $2.63 billion and debt just $933 million at the end of March 2020.  

As for Alibaba, in spite of facing COVID-19 in the first quarter (earlier than the rest of the world), revenue increased 22% from a year ago. It also reached the notable milestone of surpassing $1 trillion in merchandise value on its massive e-commerce ecosystem during the last fiscal year. And though challenges mounted, Alibaba was still solidly profitable, generating $595 million in free cash flow on revenue of $16.4 billion. Over the next five years, Alibaba is targeting 1 billion Chinese consumers served -- on its way to 2 billion global consumers and 10 million profitable businesses working on its platform by the year 2036. With $50.7 billion in cash and equivalents and $17.7 billion in debt, Alibaba's strong balance sheet will allow it to pursue those ambitions.  

Two buys for two different reasons

Clearly, MercadoLibre and Alibaba have a lot of growth runway ahead of them. MercadoLibre is a bet on increased internet usage (and therefore increased online shopping) in Latin America, while Alibaba has turned into a global tech juggernaut with tendrils spanning digital retail, services, and finance. I think both are worthy of inclusion in long-term portfolios.

However, the two companies are in different stages of their development. MercadoLibre still runs thin margins as it emphasizes growth now and profits later. But trading for 19.8 times trailing 12-month sales, a fair amount of that expansion -- especially from the coronavirus bump this year -- is already priced in. For those looking to hold for at least a few years or more, the steep price tag shouldn't be overly concerning.

Alibaba, though, turns a healthy profit on its technology services. Reflecting its size and more modest revenue growth rate, its price to sales ratio shares at 8.1. But based on the last year's worth of free cash flow, Alibaba trades for 22.7 times. For a company still very much in growth mode and generating big bottom-line returns while it does so, that's an attractive value.  

Granted, the "value" factors in ongoing tension between the U.S. and China, as well as new Senate legislation via the Holding Foreign Companies Accountable Act that could potentially force some companies to delist their stocks from U.S. exchanges. That's worth monitoring and should be taken into consideration before buying Alibaba -- or MercadoLibre, for that matter. Nevertheless, given its growth and relative value, Alibaba gets my top e-commerce stock pick of the moment after a great start to the new decade.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Alibaba Group Holding Ltd. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Amazon, and MercadoLibre. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$1,056.55 (-2.41%) $-26.11
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$92.82 (-1.46%) $-1.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.