Coupang (CPNG 1.01%) and MercadoLibre (MELI -0.45%) represent two different ways to invest in the overseas growth of e-commerce. Coupang is the top e-commerce company in South Korea, and MercadoLibre is the e-commerce leader in Latin America. Both stocks hit all-time highs during the stimulus-induced buying frenzy in growth stocks in 2021. But as of this writing, Coupang and MercadoLibre have slumped about 66% and 45%, respectively, from those record levels.
Both companies lost their luster as investors fretted over a post-pandemic slowdown in e-commerce sales. Rising interest rates also drove investors away from higher growth stocks and deflated their valuations. But could either of these e-commerce stocks stage a comeback in 2023 and beyond?
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Coupang faces slower growth in a saturated market
Coupang's biggest near-term challenge is the maturity and saturation of its main market. South Korea has a population of about 51 million, and Coupang already served 18 million active customers at the end of the third quarter of 2022. That represented 7% growth from a year earlier, but it could eventually run out of room to grow.
South Korea is also a developed country with a high internet penetration rate of 98%. So to keep expanding over the long term, Coupang needs to either pull shoppers away from its smaller competitors with promotions or squeeze out more revenue from its existing customers through its Prime-like "Rocket Wow" service, which provides free shipping options, streaming videos, and other perks for a monthly fee. Both of those strategies will squeeze its margins.
However, Coupang's number of Wow subscribers grew 50% to nine million at the end of 2021, so it's already locking in about half of its customer base. It also operates fulfillment centers within seven miles of 70% of South Korea's population, and that scale could squeeze out its smaller rivals and eventually boost its long-term margins.
Coupang's revenue surged 93% in 2020 as more people shopped online during the pandemic. But its revenue only rose 54% in 2021 as those tailwinds dissipated, then grew just 14% year over year in the first nine months of 2022 as inflation curbed consumer spending. Analysts expect its revenue to rise 13% to $20.7 billion in 2022, then grow 15% to $23.9 billion in 2023.
That slowdown is disappointing, but Coupang's profitability has also been improving as it reins in its spending. The company posted its first quarterly profit in the third quarter of 2022, and analysts expect its net loss to narrow from $1.5 billion in 2021 to just $121 million in 2022. They also expect it to generate a net profit of $396 million in 2023.
MercadoLibre continues to grow in a volatile market
MercadoLibre operates its marketplace across 18 Latin American countries, but it generates most of its revenue in Brazil, Argentina, and Mexico. Those three core markets are growing a lot faster than South Korea, but they also face unpredictable headwinds from rampant inflation and political unrest.
Despite all those challenges, MercadoLibre's revenue still rose 73% in 2020 as the pandemic spread, grew another 78% in 2021, and climbed 53% year over year in the first nine months of 2022. That robust growth was also partly driven by the expansion of its digital payments platform, Mercado Pago, and its associated fintech services.
Analysts expect MercadoLibre's revenue to rise 49% to $10.5 billion for the full year and to grow 24% to $13.1 billion in 2023. They also expect its net income to jump fivefold to $421 million in 2022 and rise 70% to $716 million in 2023.
MercadoLibre's profits are climbing as economies of scale kick in across its logistics network, which it built across thousands of miles of difficult terrain long before any of its domestic and overseas competitors. That's why it continues to gain new customers. Its number of unique active users rose 6% year over year to 127 million in the first nine months of 2022.
That only represents about a fifth of the 669 million people across Latin America and the Caribbean, so MercadoLibre still has plenty of room to expand. According to Americas Market Intelligence, the e-commerce markets of Brazil, Argentina, and Mexico could grow at compound annual rates of 22%, 32%, and 24%, respectively, from 2021 to 2025.
The valuations and verdict
Coupang and MercadoLibre trade at about 1.3 and 4.2 times their sales estimates for 2023, respectively. Coupang seems undervalued, especially if it can maintain an annual revenue growth rate in the low teens while steadily growing its profits. But MercadoLibre also doesn't look expensive if it keeps generating 20%-30% sales growth as its profits continue to rise.
I personally own both of these e-commerce stocks, but I have more faith in MercadoLibre simply because it's growing faster and its total addressable market is so much larger. Coupang is still a good value play at these prices, but it probably won't gain much momentum until it posts a few more quarters of sustainable growth.
