Shopify went public in 2015 and has rewarded shareholders with returns in excess of 2,600%. The company helps millions of merchants build out an e-commerce presence, which has resulted in hundreds of millions of people buying from Shopify merchants annually.
Shopify's place in the e-commerce ecosystem is important and won't be going away for the foreseeable future. The company even has opportunity for growth. But when it comes to upside in the stock, I believe potential returns are more attractive today for two other e-commerce platforms: Sea Limited (SE 0.05%) and MercadoLibre (MELI 3.09%).
In short, I believe that the long-term prospects for these two are at least as good as they are for Shopify. Yet their shares trade at just a fraction of Shopify's valuation. For comparison purposes, see the two metrics below: the price-to-sales ratio and price-to-free-cash-flow ratio. Both indicate that Shopify stock is the priciest.
SHOP PS Ratio data by YCharts
In short, Sea stock and MercadoLibre stock are both valued attractively compared to Shopify stock. Plus, both of these companies offer good chances for market-beating growth, as I'll explain now.
1. Sea Limited
Singapore-based Sea Limited has diverse business operations mostly in Asia. The stock's valuation has dropped off of a cliff because investors worry that it's ceding e-commerce market share in some of its key markets. There is some truth to these fears. But the competitive landscape is constantly changing and the outcome is far from certain.
November news from Indonesia is a good reminder. I'm not talking about Indonesia's recent ban of TikTok (and other social media apps) from the e-commerce space, though that does help Sea. I'm talking about recent comments from the country's small and medium-sized business minister, Teten Masduki. According to Indonesian publication Bisnis.com, Masduki supports legislation that prevents e-commerce companies from selling products at a gross loss.
Some e-commerce companies sell at a loss to gain market share. And once the competition is crushed, they raise prices. The legislation supported by Masduki would hurt some of Sea's competitors. But Sea Limited, like Shopify, is empowering third-party sellers who set their own prices. Therefore, there's no need to worry about its business model being disrupted by Masduki's proposal.
To be fair, not everything is positive for Sea right now. Its sales and marketing expenses for e-commerce skyrocketed 50% year over year in the third quarter of 2023, which was a major reason that Sea saw a quarterly net loss of $144 million. That's a big spending increase and it resulted in just 16% e-commerce revenue growth.
Moreover e-commerce is just one part of Sea's business -- it also has video games and financial technology. And the video game unit experienced a 33% year-over-year drop in revenue. However, I believe investors should give management the benefit of the doubt when it comes to balancing growth with profits to create long-term shareholder value. And the chart below demonstrates why.
SE Revenue (Quarterly YoY Growth) data by YCharts
Management has committed to self-funded growth (no financing) and has demonstrated the ability to pivot to profits quickly if necessary. And while it had losses in Q3, it still has positive earnings per share (EPS) on a trailing-12-month basis. And finally, Sea hasn't had negative growth since going public, even with the recent headwinds, which I believe counts for something.
Asia is a huge market. With less than $13 billion in trailing-12-month revenue, Sea still looks to have plenty of upside ahead.
2. MercadoLibre
Like Sea, MercadoLibre's business is multifaceted. It provides an e-commerce marketplace for third parties, has shipping-logistics operations, and offers financial services to consumers and businesses. It operates in many major markets in Latin America and business is absolutely booming.
Over the last five years, MercadoLibre has averaged about 60% year-over-year quarterly revenue growth. The company's trailing-12-month revenue is up more than 800% from five years ago.
With such stellar performance, one might think that MercadoLibre's top line would soon plateau. But the evidence is to the contrary. Consider that in the third quarter of 2023, the company generated net revenue of $3.8 billion. Adjusting for currency fluctuations, Q3 revenue was up 69% year over year -- its fastest growth in 2023. Therefore, if anything, growth is reaccelerating, not hitting a plateau.
A big reason for MercadoLibre's ongoing success is its logistics business. It can deliver the bulk of the merchandise on its platform in under 48 hours. And ongoing upgrades in Q3 have propelled on-time deliveries to an all-time high. These are the kind of things that can keep this business at the top.
In addition to top-line growth, MercadoLibre's profits are skyrocketing. In Q3, it had income from operations of $685 million, which was an all-time high and up 131% year over year. With growth showing no signs of slowing and profits sailing through the roof, MercadoLibre, like Sea, is an impressive e-commerce stock that I'd take over Shopify today.
