This year started out like any other, but the advent of COVID-19 and the pandemic-induced bear market changed everything. The shelter-in-place orders and resulting trend towards remote work shifted the digital transformation into high gear, giving some companies a significant advantage over their peers. Among the biggest beneficiaries were e-commerce, cloud computing, digital payments, streaming video and music, and social media.
Within that group are two companies in different areas of technology that have been among the biggest performers in the sector over the past decade: social media giant Facebook (NASDAQ:FB) and Latin American e-commerce and payments powerhouse MercadoLibre (NASDAQ:MELI), which have gained 635% and 1,560%, respectively, over the past 10 years.
Much like the lyrics to the song, though, investors want to know "What have you done for me lately?" Let's see how these tech titans have fared during the pandemic, and which is better positioned for future growth.
Staying connected while on lockdown
As people huddled at home to ride out the pandemic, many turned to social media to keep in touch with family and friends, playing right into Facebook's wheelhouse. The company generates nearly all its revenue from advertising on the social media platforms it operates -- Facebook, Instagram, Messenger, and WhatsApp. Combined, these sites attract 3.14 billion people per month and 2.47 billion people each day.
Even in the face of the pandemic, Facebook's revenue grew 11% year-over-year in the second quarter, clocking in at $18.69 billion, while earnings per share (EPS) of $1.80 soared 98%.
The company generated average revenue per user (ARPU) of $36.49 in North America, but far less in the rest of the developed world, dragging its worldwide ARPU down to $7.05. This illustrates not only a significant opportunity, but also a harsh reality: Monetizing the rest of the world is proving far more difficult.
The paradigm shift to e-commerce and digital payments
MercadoLibre has long been an e-commerce powerhouse in Latin America, as the market leader in each of the major countries where it operates based on unique visitors and page views. Its payments service -- Mercado Pago -- has quickly become the digital payment method of choice -- first on its platform, then on other websites, and eventually making the jump to brick-and-mortar stores.
With the onset of the pandemic, however, adoption of e-commerce and digital and touchless payments took on a greater urgency as consumers sought to avoid in-person shopping trips and touching dirty money. That's made MercadoLibre a fintech leader in its region.
In the second quarter, MercadoLibre's net revenue jumped 123% in local currencies to $878 million. E-commerce sales increased 149%, while at the same time payments on its platform climbed 111%, and off-platform payments soared 175%. This resulted in net income that more than tripled to $56 million, up from just $16 million in the prior-year quarter.
What the future holds
It's important to put these results in context to fully appreciate how this will play out. Facebook already counts nearly half of the roughly 7.6 billion people in the world as customers, and the remainder will be much harder to reach, particularly in third-world countries. Some would argue that there's still plenty of wind in its sails, as Facebook has only just begun to monetize Instagram, and WhatsApp and Messenger are waiting in the wings. The company is also working to integrate e-commerce into its platforms, though it's still early days for those efforts, and it remains to be seen if they will prosper.
By contrast, MercadoLibre is tapping a market that's still in very early innings. In Latin America, e-commerce represented about 4% of total retail at the close of 2019, compared to about 12% in the U.S. It's also worth noting that in that part of the world, digital payments are still in their infancy, but growing quickly, though the majority of purchases are still made using cash. Research reveals that roughly 70% of the population doesn't have a bank account, and only between 20% and 55% use credit cards, though that varies from country to country. This gives Mercado Pago a long runway for future growth.
A word on valuation
Facebook's stock trades at just over 35 times forward earnings and just 10 times this year's sales. While those valuations are slightly higher than average, investors appear willing to pay up for Facebook's industry-leading position and near-monopoly in the social media space.
MercadoLibre's choppy earnings and high growth rate make it somewhat more difficult to value, but at 22 times this year's sales, it's far from cheap, especially considering that an attractive price-to-sales ratio typically falls between one and two.
Yet MercadoLibre's premium valuation is more than warranted given its undisputed leadership in the Latin American e-commerce market, its eye-popping revenue growth, and the accelerating adoption of both e-commerce and digital payments as tailwinds.
There's no denying that Facebook is a solid investment, and I remain a shareholder. That said, MercadoLibre is likely to outperform Facebook in the coming months and years, for a number of reasons.
First, with the pandemic as a backdrop, the world is accelerating the shift towards e-commerce and digital payments, playing right into MercadoLibre's strengths. While Facebook could potentially benefit through its ventures in those markets, the results likely won't move the needle in the same way.
Second, if the recession drags on -- and it could -- Facebook is much more exposed to a potential pullback in digital advertising and marketing, which has historically occurred in previous periods of economic upheaval. If marketing budgets get slashed, Facebook's revenue could be the first to go.
Finally, while MercadoLibre's stock has been -- and will continue to be -- more volatile than Facebook's, that volatility shouldn't necessarily be equated with risk. With a market cap of more than $800 billion, Facebook will be much less susceptible to major price swings. Unfortunately, it's also facing the law of large numbers, which will slow its growth rate going forward. At just $60 billion, MercadoLibre stock will be more volatile, but also has significantly more upside.
My money's on MercadoLibre.