Better Buy: Alibaba vs. MercadoLibre

E-commerce has long been an attractive long-term growth industry, but the COVID-19 pandemic has only accelerated its rise. As people have had to stay home for the pandemic, current e-commerce customers are purchasing more, and new customers are now discovering the convenience of e-commerce for the first time. And with people all over the world wary of close human contact, digital payments solutions that support the new e-tail world are also on the rise.

When you combine these growth trends with the GDP growth of developing countries, it makes for a powerful trifecta. Two of the leading e-commerce players in developing countries are Chinese e-commerce leader Alibaba (BABA -0.94%) as well as Latin American e-commerce leader MercadoLibre (MELI -1.96%).

So, which of these two high-octane stocks is the better buy today?

Image source: Getty Images.

Business twins

Both MercadoLibre and Alibaba look very similar, albeit with some slight differences. Both companies were first-movers in e-commerce within their respective regions; Alibaba in China, and MercadoLibre in Latin America. Initially, each company took a capital-light approach to e-commerce, leaving existing carriers to take care of shipping, and merely taking a fee on each purchase while also collecting advertising revenue on their platforms.

However, in recent years, both companies have also been taking a bit more control of their fulfillment and delivery infrastructure. Alibaba developed its Cainiao platform, a technology infrastructure that coordinates package delivery across third-party players. In contrast, MercadoLibre has built out its Mercado Envios distribution and sortation centers, while also investing in free shipping to drive growth.

The other main business both companies have in common is electronic payments and fintech services. Both companies developed these digital payments options to facilitate e-commerce in regions where digital payments infrastructure and alternative banking were undeveloped. As such, not only are both companies first-movers in e-commerce, but also payments. More recently, both companies' fintech arms have begun underwriting loans to merchants and consumers alike.

MercadoLibre's MercadoPago platform is a more meaningful contributor, as the fintech platform made up 34% of revenue last quarter, though it had been a higher proportion prior to the pandemic. Meanwhile, Alibaba doesn't even own all of its payment subsidiary Ant Financial. Ant is actually set to have its own initial public offering sometime soon in Hong Kong and Shanghai, and is forecast to be valued around $280 billion. As the result of its somewhat dubious origination, Ant is majority-owned by Alibaba founder Jack Ma, with Alibaba only retaining around a 33% stake.

However, Alibaba has more business lines than MercadoLibre and is further along in its development. Most importantly, Alibaba is the leading cloud computing player in China. Though cloud makes up only 8% of Alibaba's revenue, it grew at 59% last quarter, and according to management is on track to reach profitability this year. In contrast, MercadoLibre does not play in cloud computing.

Alibaba has also expanded its corporate tentacles into other sectors, buying streaming service Youku Tudou, along with the Ele.me food delivery service, Hema supermarkets, and other businesses as well. So, Aliabba is a much more diverse conglomerate than MercadoLibre, though both earn a majority of their revenues from e-commerce.

Image source: Getty Images.

Recent financial results

Unsurprisingly, both companies did very well in the second quarter, as the pandemic kept people at home and ordering goods via e-commerce while using digital payments. That was enough to accelerate growth for both companies.

Data source: Alibaba and MercadoLibre recent quarter financial results. Table by author.

Both companies grew strongly and expanded their margins. In fact, MercadoLibre's margins swung from a 2% operating loss to an 11.3% operating profit. While this is largely attributed to the company's scaling back on marketing expenses, the recent quarter offers a glimpse of MercadoLibre's profit potential once it hits maturity.

Though Alibaba is growing at a slower pace, its 33.8% growth is nothing to sneeze at. Furthermore, the company is more profitable and has been using that windfall to make acquisitions. Alibaba just upped its stake in retailer Sun Art retail, and Ant Financial just took a 6.1% stake in travel retail operator Dufry. These are just a few recent examples of Alibaba's methodical acquisition approach it has used over the years.

Meanwhile, MercadoLibre is less profitable, but is in an earlier stage of its growth trajectory. Though U.S. dollar growth was 61.1%, its local currency growth was much higher at 123%. While that is extremely impressive, the depreciation of Latin American currencies is likely to be an ongoing issue for MercadoLibre going forward.

Valuation

Of course, while MercadoLibre is growing faster than Alibaba from a revenue perspective, you'll have to pay up, on both a price-to-earnings and price-to-sales basis.

Data source: Yahoo! Finance.

Both valuations seem reasonable. Alibaba is a much bigger company, and growing at a slower pace. On the other hand, Alibaba's more diverse and mature business, especially its cloud segment, also makes it less risky than MercadoLibre.

Alibaba probably has tougher competition at the moment, facing off against JD.com and Pinduoduo in China; however, Alibaba is also protected from foreign competition there. Meanwhile, while MercadoLibre has a big first-mover advantage in Latin America, both Amazon.com and Sea Limited recently entered the Brazilian market. Both entrants are quite late to the game and have to learn the ropes of Latin America as outsiders, which could prove more challenging. Nevertheless, those new entrants are worth keeping an eye on for MercadoLibre investors.

Upside or safety?

All things being equal, I would say both companies are worthy selections if you're looking for e-commerce exposure. In all, I would say Alibaba is the safer pick, because of the strong Chinese market, higher margins, and cloud computing exposure. On the other hand, it's possible MercadoLibre has more upside, albeit with more risks.

Picking one or the other is likely to depend on your risk tolerance, as well as your comfort level of investing either with China, which has a strong economy but is entangled in a trade war with the U.S., or in Latin America, with its own political and currency volatility. However, I think both are strong options and will be good e-commerce names to own over the long term.