In many respects, companies in e-commerce have built their success in various regions. Amazon (AMZN 1.49%) has led the market in its native U.S. and much of the developed world. Still, regions in the developing world may require a different approach, allowing MercadoLibre (MELI 0.87%) to lead in Latin America.
Additionally, the recent market sell-off means both stocks sell at a significant discount to 52-week highs, a strong indication that the value proposition for both companies has changed. Hence, investors should look at both companies to see which internet and direct marketing retail stock will serve them better.
Image source: Getty Images.
The case for Amazon
Amazon pioneered the industry, making it the world's largest retailer behind Walmart, according to the National Retail Federation. On top of that, an attempt to offer e-commerce platforms brought it into the cloud computing industry. This segment, known as Amazon Web Services (AWS), now accounts for most of the company's operating income.
However, Amazon's $1.2 trillion size has not insulated it from the market sell-off that has been going on over the past several months. As a result, it sells for a discount of about 40% from its 52-week high.
Amazon has also not matched its past performance. In the first quarter of 2022, it reported net sales of over $116 billion. Despite that considerable size, the 7% year-over-year increase paled in comparison to 2021, when net sales surged by 22%.
Moreover, the company reported a loss of $3.8 billion in Q1, far below the $8.1 billion it earned in the year-ago quarter. A 13% increase in operating expenses and an $8.5 billion loss that stemmed from losses in marketable equity securities and equity warrants led to the negative earnings. Amazon's second-quarter forecast of net sales gains of between 3% and 7% brought further disappointment to investors.
Nonetheless, a price-to-earnings (P/E) ratio of 56 takes its valuation close to multi-year lows. The AWS segment continues to carry the company as Q1 2022 revenue for its cloud business came in at $18.4 billion, a 37% increase year over year. The $6.5 billion in operating income more than compensated for the approximate $2.8 billion in operating losses for its North America and International segments.
Furthermore, analysts believe Amazon can still achieve 12% sales growth in 2022 and 17% in 2023, a strong indication that Amazon stock is on sale right now.
Why investors should consider MercadoLibre
Still, some may wonder if Amazon's performance will surpass that of MercadoLibre, which has become the Amazon of Latin America. Compared to Amazon, the Argentina-based company can better handle the financial and logistical challenges of doing business in its region.
Since Latin America is primarily a cash-based society, MercadoLibre began a fintech division called Mercado Pago to send and receive payments. That has turned into one of its principal revenue drivers, and its fintech services now include a digital wallet, credit offerings, and point-of-sale services. The conglomerate has also benefited from Mercado Envios, a fulfillment business that can handle the packaging and shipping needs for both itself and other enterprises.
Despite these offerings, MercadoLibre is a small fraction of Amazon's size, supporting a market cap of about $48 billion. Amid the market sell-off, its stock sells at a discount of more than 50% compared to its 52-week high.
Despite that drop, its growth remains strong. MercadoLibre's Q1 2022 revenue came in at $2.2 billion, a 67% increase year over year. This was only a modest dropoff from the 2021 revenue growth rate of 78%.
The Q1 net income of $65 million improved from the $34 million loss in the same quarter last year. Though operating expenses surged by 87%, its cost of revenue rose by only 47%, giving the company the leeway to turn profitable.
Admittedly, its price-to-sales (P/S) ratio of nearly seven is significantly higher than Amazon's 2.5 sales multiple. With 2022 revenue growth forecast at 38% by analysts, the increases also may not maintain their current pace. Still, MercadoLibre's P/S ratio is near multi-year lows, and the forecast 2022 revenue growth rate exceeds that of Amazon, providing reasonable grounds to pay a higher valuation.
So, Amazon or MercadoLibre?
While both companies should continue to prosper, MercadoLibre is more likely to deliver higher returns. Though more expensive, its smaller size and more rapid revenue growth point to the potential for more unrealized growth. Plus, with its fintech and logistics-related investments, its competitive moat allows MercadoLibre to not only lead retail and fintech in Latin America, but to deliver higher returns than Amazon.
