MercadoLibre (MELI 0.39%) and Sea Limited (SE 2.79%) dominate two of the world's fastest-growing e-commerce markets. MercadoLibre is the market leader in Latin America, where it operates its online marketplace across 18 countries. Sea's Shopee is the e-commerce leader in Southeast Asia and Taiwan.
MercadoLibre and Sea also integrate their own digital payment services -- Mercado Pago and Sea Money, respectively -- into their own online marketplaces. But there's one key difference: MercadoLibre's core business revolves around its online marketplace, while Sea owns a video game publisher called Garena. Garena's top game, the battle royale title Free Fire, is currently one of the world's most downloaded mobile games.
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MercadoLibre and Sea both saw their stocks close at record highs during the buying frenzy in growth and meme stocks in 2021. But as of this writing, MercadoLibre and Sea still trade about 35% and 89%, respectively, below those all-time highs. Let's see why MercadoLibre suffered a milder decline than Sea -- and if it's still a better all-around investment.
MercadoLibre is still growing like a weed
MercadoLibre's annual revenue rose at a compound annual growth rate (CAGR) of 50% from 2017 to 2022. That growth was driven by its robust growth across its three largest markets -- Brazil, Mexico, and Argentina -- as well as rising e-commerce penetration rates across the rest of Latin America. MercadoLibre's expansion of its first-party logistics network across some challenging terrain over the past two decades also enabled it to maintain its lead and prevent other overseas challengers like Amazon (NASDAQ: AMZN) and Shopee (which entered Latin America in 2019) from gaining much ground.
MercadoLibre served 135 million unique active users in the first half of 2023, but that's only about a fifth of the population of Latin America and the Caribbean. Mordor Intelligence estimates the Latin American e-commerce market can still grow at a CAGR of 19% from 2023 to 2028 as the region's e-commerce penetration rate rises -- so it could still have plenty of room to grow. MercadoLibre's revenue rose 49% to $10.5 billion in 2022, and analysts expect its top line to continue growing at a CAGR of 25% from 2022 to 2025.
MercadoLibre was unprofitable for years, but its operating margin finally turned positive in 2020, and it squeezed out a full-year net profit in 2021. Its net profit rose nearly sixfold to $482 million in 2022, and analysts predict that figure to grow at a CAGR of 62% from 2022 to 2025. Those soaring profits can be attributed to its improving scale, which dilutes its logistics and payment processing costs, lowers marketing expenses, and facilitates the expansion of its higher-margin third-party marketplace.
Sea faces existential problems
Sea's revenue grew at a jaw-dropping CAGR of 86% from 2017 to 2022. That growth was driven by the rapid expansion of Shopee, Free Fire's soaring popularity, and pandemic-induced tailwinds for both its e-commerce and gaming businesses.
But unlike MercadoLibre, which wisely capitalized on its initial growth spurt to fortify its core market through an expansion of its first-party logistics network, Sea aggressively expanded Shopee overseas into Latin America, Europe, and India. That costly international expansion diverted resources away from its core markets of Southeast Asia and Taiwan, where it still faced stiff competition from Alibaba's (NYSE: BABA) Lazada and other regional marketplaces.
At the same time, Free Fire lost its momentum as the broader gaming market grappled with a post-pandemic slowdown. Free Fire was also banned in India, its fastest-growing market, last year. That deceleration exposed Sea's Achilles' heel: its constant use of Free Fire's profits to subsidize Shopee's loss-leading expansion. Once Free Fire lost its momentum, Shopee hastily reined in its spending, limited its shipping subsidies and promotions, and retreated from its weaker overseas markets.
But at the same time, Sea ramped up its spending on the expansion of its own logistics network in Southeast Asia and Taiwan in a bid to improve the region's long-term profitability. For 2023, analysts expect Sea's revenue to dip 2% to $12.2 billion as it generates a net profit of $671 million -- compared to a net loss of $1.7 billion in 2022 -- as all three of its core businesses (e-commerce, gaming, and fintech) turn consistently profitable.
Sea's stable profit growth is a step in the right direction, but its tepid sales growth disappointed the bulls who had expected it to be the top play on the Southeast Asian e-commerce market -- which could still grow at a CAGR of 22% from 2022 to 2026, according to McKinsey. Sea's prioritization of its near-term profits over its long-term sales growth could also narrow its moat.
The valuations and verdict
MercadoLibre trades at 5 times this year's sales, while Sea trades at just 2 times this year's sales. However, I believe MercadoLibre is still a better buy than Sea for four simple reasons: it's growing faster, its scale is finally boosting its profits, it has a much wider moat, and its future isn't overwhelmingly dependent on the future growth of a single mobile game.
