I compared Baidu (BIDU 2.12%) to MercadoLibre (MELI 1.38%) last November. At the time, I declared MercadoLibre was the better investment because it was growing faster, faced fewer competitive threats, and benefited from pandemic-induced online shopping trends.
Baidu traded at much lower valuations than MercadoLibre, but it faced tough competitors in China as the pandemic battered its core advertising business. Yet Baidu's stock has rallied nearly 40% since I made that call, while MercadoLibre's stock has risen just over 20%.
Did I underestimate Baidu's resilience while overestimating MercadoLibre's ability to justify its valuations? Let's take a fresh look at both companies to decide.
Baidu's business is gradually recovering
Baidu owns China's largest search engine, but it faces fierce competition from monolithic messaging and Mini Program platforms like Tencent's (TCEHY -0.33%) WeChat, news aggregator apps like ByteDance's Jinri Toutiao, and Gen Z-oriented media platforms like Bilibili (BILI 2.21%).
As people spend more time on those platforms, Baidu's search-based ads become less appealing to advertisers. Throughout the pandemic, many companies used their limited marketing budgets to buy ads on WeChat, Bilibili, and other platforms instead of Baidu.
In response, Baidu launched more managed business pages for companies, expanded its BJH content creation platform, attracted more Mini Program developers to its mobile app, and expanded its DuerOS virtual assistant across more connected devices.
Baidu generated 68% of its revenue from its online marketing services last year. The rest of its revenue mainly came from its streaming video subsidiary iQiyi (IQ 4.07%) and its cloud infrastructure platform.
Baidu's revenue stayed nearly flat last year, as Baidu Cloud's growth offset the weakness of its online marketing business. iQiyi also struggled against tough competition from Tencent Video, Alibaba's Youku Tudou, and various short video apps. However, Baidu's adjusted earnings still improved 23% as it reduced its search engine's traffic acquisition costs and reined in its other operating expenses.
In the first quarter of 2021, Baidu's revenue rose 25% year-over-year as its online marketing revenue increased for the first time in eight quarters. Is cloud revenue also surged 55% and accounted for 10% of its top line. Its adjusted earnings grew 39%.
Baidu benefited from an easy year-over-year comparison to the pandemic's initial impact in the first quarter of 2020, but analysts expect its revenue to rise 21% for the full year. They expect its full-year earnings to dip 5% as it ramps up its investments again -- but those efforts could expand its reach into next-gen markets like AI, electric vehicles, and driverless cars.
MercadoLibre is still firing on all cylinders
MercadoLibre is the largest e-commerce company in Latin America, and it generates most of its revenue from shoppers in Brazil, Argentina, and Mexico. It enjoys a first-mover's advantage across the region, and it's established a lead that even Amazon still can't touch.
Like many other online marketplaces, MercadoLibre experienced accelerating growth during the pandemic as more people stayed at home. Its revenue surged 73% in 2020 as its net loss narrowed significantly. Its number of unique active users for the year jumped 79% to 132.5 million, while its gross merchandise volume (GMV) increased 50% to $20.9 billion.
In the first quarter of 2021, MercadoLibre's revenue grew 111% year-over-year. Its unique active users rose 62% to 69.8 million, while its GMV climbed 77% to $6.1 billion. However, its net loss widened as it continued to expand its logistics network and payments ecosystem.
MercadoLibre's payments ecosystem revolves around its digital payments platform Mercado Pago. The platform's total payment volume (TPV) rose 84% in 2020 and increased another 82% year-over-year in the first quarter of 2021 -- making it one of the most promising fintech plays in Latin America.
Wall Street expects MercadoLibre's revenue to rise 58% this year, with a slim full-year profit. That's an impressive growth rate in USD terms, but MercadoLibre's growth rates are actually much higher on a constant currency basis, which excludes the unfavorable exchange rates across many of its top markets.
The valuations and verdict
Baidu trades at 16 times forward earnings and three times this year's sales. Those valuations are low, but the Chinese government's ongoing crackdown on big tech companies and persistent delisting threats in the U.S. are probably weighing down the stock.
MercadoLibre trades at more than 340 times forward earnings and 12 times this year's sales. The stock looks pricey relative to its slim profits, but seems reasonably valued relative to its sales growth -- as well as the price-to-sales ratios of other high-growth tech stocks.
I own both of these stocks, but I still believe MercadoLibre will outperform Baidu. MercadoLibre's stock isn't that expensive relative to its growth potential as Latin America's top e-commerce and fintech company, but Baidu's stock isn't that cheap when we consider all the competitive and regulatory threats.