Etsy (ETSY 0.34%) and MercadoLibre (MELI 3.09%) both saw their stocks hit all-time highs last year. However, Etsy's stock subsequently lost about two-thirds of its value as MercadoLibre's stock was cut in half.
Investors dumped both high-growth e-commerce stocks for similar reasons: They faced tougher year-over-year comparisons in a post-lockdown market, their costs were climbing as they expanded their ecosystems, and rising interest rates made them less appealing than cheaper value stocks.
But did investors toss out two babies with the bathwater? Let's see if either of the fallen e-commerce darlings is still worth buying in this tough market.
Image source: Getty Images.
How fast is Etsy growing?
Etsy has consistently grown in Amazon's shadow by carving out a defensible niche in handmade and customized products. Over the past three years, it expanded its ecosystem by acquiring the musical instruments marketplace Reverb, the U.K.-based fashion resale marketplace Depop, and the Brazilian artisan marketplace Elo7.
Etsy's revenue surged 111% to $1.73 billion in 2020 as pandemic-induced lockdowns, stimulus checks, and mask sales generated strong tailwinds for its business. Its gross merchandise sales (GMS) surged 107% to $10.3 billion, its number of active buyers grew 77% to 81.9 million, and its active sellers increased 62% to 4.4 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared 195% to $549 million, which boosted its adjusted EBITDA margin from 22.8% to 31.8%.
But in 2021, its revenue only rose 35% to $2.33 billion as its GMS grew 31% to $13.49 billion. Its growth cooled off as its pandemic-related headwinds dissipated, but its number of active buyers still increased 18% to 96.3 million as its number of active sellers jumped 72% to 7.5 million.
Etsy's adjusted EBITDA still rose 31% to $717 million, but its adjusted EBITDA margin fell 100 basis points to 30.8%. That contraction was caused by its integration of Reverb, Depop, and Elo7, which all operate at lower margins than its namesake marketplace. It also ramped up its investments in its internal search engine, Xwalk, as well as new video features for merchants.
Analysts expect Etsy's revenue to rise 18% in 2022, but for its adjusted EBITDA to rise 9% as its margins continue to decline. But in 2023, they expect its revenue and adjusted EBITDA to grow 20% and 25%, respectively, as it scales up its business and reins in its spending.
Based on those expectations, Etsy's stock looks fairly cheap at 16 times this year's adjusted EBITDA and five times this year's sales.
How fast is MercadoLibre growing?
As the largest e-commerce player in Latin America, MercadoLibre experienced massive growth during the pandemic as brick-and-mortar businesses temporarily shut down.
In 2020, its revenue surged 73% to $3.97 billion, its gross merchandise volume (GMV) rose 50% to $20.9 billion, and its number of unique active users climbed 79% to 132.5 million. Its total payment volume (TPV), which includes payments processed by its fintech platform Mercado Pago, improved 84% to $15.94 billion.
The company also generated adjusted EBITDA of $233 million for the year, which gave it a corresponding margin of 5.9% and marked a big improvement from its adjusted EBITDA loss of $80 million in 2019.
In 2021, MercadoLibre's revenue rose 78% to $7.07 billion, which accelerated slightly from the previous year. Its GMV grew 35% to $28.4 billion, its number of unique active users rose 5% to 139.5 million, and its TPV increased 55% to $77.4 billion -- but all three growth rates cooled off from the previous year as more brick-and-mortar businesses reopened.
However, its adjusted EBITDA still surged 177% to $645 million, even as it plowed more cash into its managed logistics network and fintech ecosystem, and its adjusted EBITDA margin jumped to 9.1%.
Analysts expect MercadoLibre's revenue and adjusted EBITDA to both rise about 38% in 2022 as the pandemic finally ends. In 2023, they expect its revenue and adjusted EBITDA to grow 34% and 60%, respectively. Based on those high expectations, MercadoLibre's stock also looks historically cheap at 56 times this year's adjusted EBITDA and five times this year's sales.
Which stock is the better buy right now?
Etsy and MercadoLibre are both promising growth stocks, but there's a key difference. Etsy doesn't face as many direct competitors as MercadoLibre, which faces aggressive competitors like Sea Limited's Shopee, Amazon, Alibaba Group Holding's AliExpress, and other smaller start-ups across Latin America.
MercadoLibre will likely keep growing as Latin America's e-commerce penetration rates rise -- but it will also need to spend a lot of money to maintain its first-mover's advantage. Etsy should face fewer competitors and maintain higher margins by letting its merchants fulfill their own orders.
Both stocks will likely remain out of favor as long as investors shun e-commerce companies in this post-lockdown market. But if I had to choose one over the other, I'd buy Etsy because its growth is more predictable, its margins are higher, its moat is wider, and its stock is cheaper.
