Better Buy: Shopify vs. MercadoLibre

E-commerce stocks have benefited from a surge in online activity as many non-essential brick-and-mortar retailers have had to close due to the coronavirus. MercadoLibre (MELI -1.12%), the leading e-commerce player serving Latin America, has seen its stock climb more than 75% since the beginning of the year, trouncing the S&P 500. But Shopify (SHOP -2.88%), the software platform that enables businesses to run their online stores, has rocketed even higher with a more than 150% gain year to date.

Stock data year-to-date through July 10, 2020. Data by YCharts.

With e-commerce still in its early innings, which of these two operators would be a better buy today? Let's compare both companies in terms of their growth, addressable market, financial stability, leadership, and valuation to pick a winner.

Growth

Both companies have seen incredible growth since their inception. Over the last several years, Shopify's growth has been slowing as it gets larger, but it still posts impressive year-over-year gains in the 40%-plus range.

Data by YCharts.

On the surface, MercadoLibre's track record seems somewhat irregular, but this is mainly due to currency fluctuations in the Latin American region as its revenue must be converted to U.S. dollars for financial reporting. For example, in the first quarter, net revenues were up 70.5% in local currencies but just 37.6% after conversion. Looking back at currency-neutral gains shows more impressive annual figures of 61%, 50%, and 92% for 2017, 2018, and 2019, respectively.

So MercadoLibre has the edge with its currency-neutral results not only coming in higher but accelerating last year, which bodes well for the future prospects of this Latin American operator.

Winner: MercadoLibre

Addressable market

Shopify's management has cited its addressable market for small and medium-sized businesses at $78 billion, but this could be underestimating the opportunity. That $78 billion figure is based on revenue per merchant from 2019 and the number of small businesses with fewer than 500 employees globally. This doesn't factor in the continual expansion of the company's offerings like its fulfillment network or the opportunity to land larger enterprises with its Shopify Plus program. Its trailing 12-month revenue of $1.73 billion puts its market share at just 2% of management's estimated total.

Image source: Getty Images.

MercadoLibre is serving a market of 638 million people with significantly more internet users than the U.S (and growing). In 2019, e-commerce penetration for the region was just over 4% of total retail sales -- just one-third of U.S. levels. Additionally, the company's payments system serves a huge regional need. Only 37% to 70% of people in its key markets have a bank account, and only 25% to 59% own a debit card.

It's tough to call a winner here as both are looking at huge and growing markets.

Winner: Tie

Financial stability

With a challenging economic environment brought on by the global pandemic, it's important to consider financial fortitude as a key part of your investment decision.

Data source: S&P Capital IQ. Table by author.

Both companies have a treasure trove of cash to help fund growth with enough reserves to cover losses for many years to come. But with Shopify's zero debt position, it gets the edge for financial stability.

Winner: Shopify

Leadership

For companies in growth mode, it's especially important to have experienced leadership. Shopify's founder and CEO Tobias Lutke is well respected by investors and the tech community. He's constantly driving the company to innovate and building leaders in his organization. Lutke shares leadership responsibility with two longtime executives: Chief Operating Officer Harley Finkelstein, who has been with the company since 2010, and Chief Product Officer Craig Miller, who joined in 2011.

MercadoLibre is also founder-led by Chairman, President, and CEO Marcos Galperin, who has built a solid bench of long-term partners. The Chief Financial Officer, Chief Operating Officer, and Executive Vice President of Fintech have an average of 19 years with the company. This team of experienced talent is a tremendous advantage for this e-commerce company operating in a challenging emerging market.

Winner: Tie

Valuation

Since neither company is reporting profits, it doesn't make sense to look at price-to-earnings ratios, so let's compare the enterprise value-to-sales numbers. This metric is a good one to use for tech companies with large cash positions as it removes the effect of the cash and debt from the valuation comparison. Over time, Shopify has consistently carried a higher valuation based on this metric due to its growth rates and asset-light business.

Data by YCharts.

But in the last 12 months, Shopify's ratio has climbed considerably, putting it at levels that Amazon never reached, even during the dot-com boom.

Winner: MercadoLibre

And the better buy is ...

Overall, Shopify's solid balance sheet doesn't make up for slowing growth and a nosebleed valuation. Even though MercadoLibre's own valuation isn't cheap by any means, it's a recognized leader in a region where e-commerce and payments are just getting started, which make it worth the premium. It also scores solid marks for its large and growing addressable market, experienced leadership team, and financial stability, pushing the Latin American e-commerce platform over the top as the better buy.