While Amazon (AMZN -2.56%) is the world leader in the overall e-commerce market, MercadoLibre (MELI -1.01%) actually leads the category in Latin America. Both stocks have put up incredible performance over the last half-decade, but you may be wondering which company is currently the better investment. Read on to see why these two Motley Fool contributors disagree on which stock is the better buy.
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Amazon is the e-commerce giant turned everything store
Parkev Tatevosian: Amazon may have started as a small e-commerce company selling books but has turned into a giant with $470 billion in revenue in 2021. In addition to selling books on its platform, Amazon owns a chain of grocery stores, a robust cloud services business, generates billions in ad revenue, and so much more. Expanding into new areas has helped Amazon grow from $61 billion in sales in 2012 to the $470 billion mentioned above.
With rising sales, Amazon's profits have soared. From a measly $676 million operating income in 2012, it jumped to $24.9 billion in the metric in 2021. Its massive scale has allowed it to invest in arguably the largest delivery network in the world. Amazon offers its Prime members (customers who pay extra fees) fast and free shipping on millions of products with no minimum purchase requirement. That's a feature that would be unfeasible for nearly any other business. Amazon makes it worthwhile because of the hundreds of millions of customers who order items frequently. Since many customers choose where to shop based on the speed of delivery, it gives Amazon a competitive advantage in a crucial customer category.
However, Amazon may have over-invested in its fulfillment network during the heights of the pandemic when sales and customers surged. Those investments are weighing on Amazon's profitability in the near term as consumers return to shopping in person. Still, online spending has been trending upward for roughly two decades and is expected to continue on that trajectory. Despite the near-term adjustment, Amazon is poised to benefit from that growth in the long run.
Amazon is great, but MercadoLibre offers more upside
Keith Noonan: I think Amazon is a fantastic company, and its overall competitive advantages are much stronger than MercadoLibre's. However, MercadoLibre still has a leading position in its geographic market, and the company's much smaller size potentially sets the stage for more impressive returns. While Amazon already has a market capitalization of roughly $1.48 trillion, MercadoLibre is valued at a much smaller $53 billion.
Admittedly, MercadoLibre is generating much less revenue than Amazon, and it doesn't have the hugely profitable cloud infrastructure business to power earnings growth. However, the Latin American e-commerce leader is growing much quicker than Amazon right now. While online retail tends to be a low-margin business, MercadoLibre also has its own high-margin growth driver in the form of its payment- processing and other fintech services business.
Last quarter, MercadoLibre managed to grow revenue roughly 56.5% year over year on a currency adjusted basis, and its gross profit margin expanded to 49.4% -- up from 44.3% in the prior-year period. Despite strong business performance, MercadoLibre stock has gotten hammered amid the pullback for growth stocks this year and macroeconomic headwinds impacting key geographic segments for the company, including Argentina and Brazil.
While inflation and other challenges could lead to continued turbulence for the stock, these dynamics have also pushed MercadoLibre's valuation down to levels that leave room for massive long-term returns. If you're willing to embrace some near-term volatility, I think MercadoLibre looks like a great buy right now.
Which e-commerce player is the better buy?
For investors seeking growth stocks backed by dominant businesses, Amazon looks to be a lower-risk investment that still offers attractive long-term upside. However, for investors who are willing to take on some of the volatility and macroeconomic risk that are associated with businesses based in emerging markets, MercadoLibre could deliver even more explosive returns. This is a case where investors could be well served by investing in both stocks.
