E-commerce is an exceptionally attractive sector offering investment alternatives with tremendous opportunities for long term growth. Which company should you "click to buy": Amazon (AMZN 1.19%), eBay (EBAY +2.10%) or MercadoLibre (MELI +1.36%)?
Amazon is all about the future
Amazon is deeply focused on future growth opportunities, even if they come at the expense of current profitability. CEO Jeff Bezos has been quite explicit about that from the beginning, from his letter to shareholders in 1997:
We will continue to focus relentlessly on our customers. We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
The company has certainly lived up to that promise through the years; Amazon has gone from an online bookstore to a major retailer selling all kinds of products with massive scale and remarkable efficiency. In addition to that, the company has expanded into other business areas with promising prospects like online content, hardware and cloud computing services.
Revenues have grown at an amazing rate of 32.7% annually over the last five years, but profitability remains scarce as Amazon keeps focused on strengthening its competitive position. The company operates with razor-thin, or even negative, profit margins to gain market share versus the competition, and investments in areas like warehouses and digital content are a heavy burden for margins and free cash flows.
An investment in Amazon can hardly be justified by current earnings, a position in the company requires the conviction to look beyond traditional valuation metrics and focus on the long term opportunity. On the other hand, for investors looking for a disruptive growth company with a visionary management team, Amazon is a fairly unique opportunity.
eBay and the digital payments revolution
eBay is behind Amazon when it comes to market share in e-commerce, but the company follows a different strategy in terms of its relationship with traditional brick and mortar retailers. While most retailers consider Amazon a dreaded competitive threat, eBay offers those companies the possibility to enter the e-commerce revolution with a big and proven platform of solutions.
Besides, PayPal is a key strategic asset for eBay and its shareholders. With more than 137 million active registered accounts, PayPal is benefiting from the self sustainable competitive advantages provided by the network effect, and this puts eBay in a privileged position to benefit from the digital payments boom for years to come.
While Marketplaces delivered a 12% increase in revenue to $2 billion for the last quarter, PayPal produced a growth rate of 19% to $1.6 billion during the period. If PayPal continues outgrowing Marketplaces over the coming years, it will become a bigger part of the company´s overall revenues, and this could mean accelerating growth for eBay in the middle term.
Unlike Amazon, eBay is a very profitable company with operating margins in the area of 20% of revenue. Besides, the stock is trading at a moderate valuation with a forward P/E ratio near 15.7.
eBay could be the way to go for investors who like to have their investment thesis supported by sound financial figures, in addition to that, the long term growth prospects provided by PayPal are certainly quite attractive.
Mercado Libre for emerging growth
MercadoLibre is usually referred to as "the eBay of Latin America," and for good reasons. With nearly 18% ownership, eBay is a major shareholder in MercadoLibre, and both companies have similar business models.
MercadoLibre operates the largest e-commerce platform in Latin America, and MercadoPago plays a similar role for the company to the one PayPal plays for eBay: not only a popular payment system inside the platform, but also an independent business opportunity on a stand-alone basis.
The Latin America e-commerce industry still offers plenty of room for growth in the long term. According to the company, only 1.5% of retail transactions are done online and just 10% of the population shops online in the region. As Internet penetration deepens and people become increasingly familiar with e-commerce in general and MercadoLibre in particular, the company stands to benefit from strong secular growth drivers.
On the other hand, currency risks could present serious headwinds for MercadoLibre in the middle term, especially when it comes to Argentina and Venezuela which represent 27% and 19% of revenue respectively. Both countries are going through serious economic uncertainties, and this could have a material impact on the company´s financial figures when translated to U.S dollars.
The stock doesn´t come cheap with a forward P/E ratio over 34, but the company has sky-high profit margins above 30% at the operating level. Besides, e-commerce is a high growth business and Latin America is a high growth region, so MercadoLibre offers some truly exceptional long term growth prospects.
Bottom Line
Amazon is the disruptive growth company for investors willing to focus on long term growth as opposed to current profitability. eBay offers higher margins and exciting possibilities in digital payments for a reasonable valuation. MercadoLibre could present some serious currency risks, but the e-commerce industry in Latin America has extraordinary potential for growth.
Depending on investor´s preferences, there is plenty of variety to choose from in the e-commerce business.
