The coronavirus crisis turned the retail world upside down last year. Long-established business practices and traditions went out the window, replaced by a marketwide focus on digital orders and home delivery services. Some retail companies suffer in this reshaped business environment, but others are thriving. For instance, retail giant Walmart (WMT 1.74%) has seen share prices rise 21% since the start of 2020. South American online auctions veteran MercadoLibre (MELI +3.35%) gained 172% over the same period. The broader market rose 39% at the same time, giving MercadoLibre a large head start while Walmart fell behind.
Will these trends continue, or is it time to pick up Walmart shares at a discount today? Let's find out.
Profitable business growth
MercadoLibre is making the most of this unique moment in history. The company's sales growth has accelerated in each of the last four earnings reports. In May's first-quarter report, sales jumped 158% year over year as measured in local currencies. Online revenues are skyrocketing higher by triple-digit percentages in MercadoLibre's three largest markets (Argentina, Brazil, Mexico). In addition, the company is enjoying massive consumer demand for its convenient e-commerce solutions and keeping a larger slice of each transaction on its popular consumer-to-consumer platforms.
The massive top-line windfall allowed MercadoLibre to collect $1.2 billion of operating cash flows in fiscal year 2020, up from $451 million in the previous year. This generous inflow of cash profits allowed MercadoLibre to more than double its capital expenses in the first quarter, building a continentwide infrastructure to support continued growth for the foreseeable future.
Looking ahead, management expects strong results from its shipping services and digital payments. The company is even building a portfolio of cryptocurrency holdings, calling it "a good use of long-term store value for our treasury at the right amount and at the prudent amounts."
In short, MercadoLibre is more than just an e-commerce business in an era of strong e-commerce opportunities. The company is also keeping its long-term options open, always striving to stay on the leading edge on retail and finance technologies. This is a stock I wouldn't mind holding for the next couple of decades, watching the tremendous growth story unfold over time.
Too big to fail?
Walmart is a very different story. Where MercadoLibre leads the charge into the brave new world of doing business mostly online and remotely, Walmart is reluctant to make any dramatic changes to its more traditional business model. But, in all fairness, management's hand is forced by the sheer scale of Walmart's enormous back-end infrastructure. At the latest count, Walmart had $91 billion of property and equipment to manage and another $13.7 billion in operating leases. That's a lot of cash tied up in a global network of stores and warehouses.
The company is off to a sputtering start to its serious e-commerce ambitions, despite the highly favorable market conditions. Digital sales rose 43% in the first quarter and accounted for 12% of Walmart's total revenues.
I can't fault Walmart for trying to protect the old ways under these circumstances, but I don't expect great shareholder returns over the next couple of decades either. This lumbering titan is too big to change quickly.
Image source: Getty Images.
What's next?
Walmart is still a solid choice for some investors. Walmart comes with a market cap of $392 billion and $563 billion in trailing sales. The company's coffers are bulging with $22.8 billion in cash equivalents, though the cash reserves are balanced against $40.3 billion of long-term debt papers. What I call "slow growth" may look like "rock-solid stability" to other analysts, and Walmart also offers a dividend yield of 1.6%. That's a better return than any savings account you'll find in this economy.
But if you want something more than an ultra-stable place to store some of your cash, MercadoLibre offers the promise of tremendous business growth and equally powerful shareholder returns for the long haul. Walmart's high-growth days are far behind us. Therefore, I would much rather buy MercadoLibre at a valuation of 16 times trailing sales than Walmart at 0.7 times sales. Sometimes you get what you pay for.
