MercadoLibre (MELI -0.73%) and Alibaba (BABA -0.62%) are two of the world's largest e-commerce companies. MercadoLibre, founded in Argentina in 1999, is Latin America's leading e-commerce player with a presence in 18 countries. Alibaba launched the same year and has become China's top e-commerce and cloud services company.
Both companies have generated significant returns for their early investors. MercadoLibre went public at $18 per share in 2007, and the stock currently trades for nearly $1,700. Alibaba made its market debut at $68 in 2014, and shares trade at over $240 as of this writing.
MercadoLibre stock surged almost 150% over the past 12 months as the pandemic caused more people to shop online. Meanwhile, Alibaba stock advanced less than 20% during the same period as ongoing regulatory concerns kept many investors away. But past performance never guarantees future gains, so let's take a fresh look at both e-commerce giants to see which is the better buy.
The differences between MercadoLibre and Alibaba
MercadoLibre splits its operation into two main segments: its commerce business, which earns commissions and shipping fees from sellers, and its fintech business, which includes its payment service Mercado Pago and its credit system Mercado Credito.
The company generated 64% of its revenue from its commerce business in the first nine months of 2020 with the rest coming from its fintech services. It isn't consistently profitable, but it stayed in the black through much of 2020 as its explosive revenue growth outpaced rising operating expenses.
Alibaba splits its business into four main segments: the core commerce unit, which covers its online and brick-and-mortar stores; Alibaba Cloud, its cloud infrastructure platform; the digital media and entertainment unit, which includes its streaming media and online gaming businesses; and the innovation initiatives segment, which houses its other non-core businesses.
Though there are four reporting segments, Alibaba generated 87% of its revenue and the entirety of its profits from its core commerce business in the first nine months of fiscal 2021 (which ends March 31). The company is consistently profitable, but it continually subsidizes the growth of its unprofitable ventures with its core commerce segment.
Which e-commerce giant is growing faster?
MercadoLibre's revenue rose 63% year over year to $2.65 billion in the first nine months of 2020. It generated nearly 95% of its revenue from Brazil, Argentina, and Mexico, and ended the third quarter with 76.1 million unique active users, up 92%.
During the third quarter, its GMV (gross merchandise volume), or the value of all products sold on its marketplaces, surged 62% year over year (117% in constant currency). As for the fintech segment, Mercado Pago's TPV (total payment volume) also soared an impressive 92% to $14.5 billion (161% in constant currency).
Management attributed that growth to an accelerated shift toward online shopping throughout the pandemic. On the bottom line, net profits of $49.9 million in the first nine months of 2020 were a complete reversal of the $118.0 million loss reported in the year-ago period. Robust revenue growth and tighter spending measures offset higher shipping costs and slimmer product margins last year.
Turning to its counterpart in the Chinese market, Alibaba grew revenue 34% year over year to 529.9 billion yuan ($81.2 billion) in the first nine months of fiscal 2021. Core commerce revenue rose 34%, but its margins are contracting as the company relies more on lower-margin businesses (including its brick-and-mortar stores, cross-border marketplace, direct sales, and logistics unit) to drive its top-line growth.
Total margins remain stable for now, and non-GAAP net income still rose 32% to 145.8 billion yuan ($22.3 billion) over the same period. But looking ahead, Alibaba could face mounting pressure to narrow the losses at its three unprofitable businesses as its core commerce profitability declines.
Alibaba also faces an ongoing antitrust probe in China, which could force it to eliminate its exclusive deals with merchants and aggressive pricing strategies for new users. Those headwinds, along with intense domestic competition and tighter auditing requirements for Chinese stocks in the U.S., likely held Alibaba stock back as other e-commerce stocks soared over the past year.
The winner: MercadoLibre
Analysts expect MercadoLibre to end 2020 with 68% top-line growth, and that number will slow to 42% for the current year. Profits will continue rising too, but the stock still looks pricey at 570 times forward earnings and 15 times 2021 sales, even though it may be cheaper relative to other high-growth tech stocks.
Alibaba is not far behind with consensus estimates for 51% and 31% revenue growth in fiscal 2021 and 2022, respectively. Earnings should also continue rising at a double-digit rate. Those are impressive numbers for a stock that trades at just 20 times forward earnings and less than five times sales, but its regulatory hurdles could still cause it to miss those rosy expectations and result in other challenges for the company long term.
MercadoLibre ultimately has more room to expand in Latin America, which is less saturated by online marketplaces than China, and it faces fewer direct competitors and regulatory headwinds. It also won't suffer as much as Alibaba if trade tensions escalate between the U.S. and China again. That's why I personally own MercadoLibre rather than Alibaba, and investors are better off buying the former over the latter right now.