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Ignore eBay Inc.: Here's a Better Stock

By Andrés Cardenal - Jan 13, 2016 at 1:48PM

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This emerging-markets leader offers explosive potential.

eBay (EBAY 1.79%) is a solid player in e-commerce: The company is clearly in the second position behind Amazon (AMZN 2.07%) in the U.S., and the business model is quite profitable. However, growth rates are underwhelming, and it won't be easy for eBay to jump-start sales while facing crushing competitive pressure from Amazon. Investors looking for explosive growth opportunities in the sector should take a look at MercadoLibre (MELI 4.71%) instead.

eBay's biggest problem is called Amazon
There is nothing necessarily wrong with eBay as a company or as an investment. Far from it. eBay is a recognized name in e-commerce, and it features a big customer base with 159 million active accounts as of the third quarter of 2015. The company acts as a commerce facilitator matching buyers and sellers of all kinds of products, so it doesn't face inventory risk or logistics costs. This allows eBay to produce juicy operating margins in the area of 27% of revenue.

On the other hand, Amazon is the undisputed king in e-commerce in terms of both sales and growth. Amazon is expected to produce total sales around $107.3 billion in 2015, so the company is substantially bigger than eBay and its $8.6 billion in forecast revenue for the year. Not only that, but Wall Street is expecting Amazon to increase sales by a staggering 20.9% during 2016 versus a far more modest increase in revenue of 4.7% for eBay.  

There is no reason to expect a reversal in the competitive dynamics between Amazon and eBay anytime soon. Scale is a big advantage in the industry, and Amazon's gargantuan size allows it to negotiate aggressively low prices with suppliers while attracting tons of third-party sellers to the platform in search for business opportunities. In addition, Amazon is well-known for its relentless competitive drive: The company is willing to operate with minuscule profit margins in order to sustain sales growth and steal market share away from competitors.

eBay is a solid business, but you shouldn't expect explosive growth from the company as long as it needs to compete with a massive online retail powerhouse such as Amazon.

Consider the eBay of Latin America instead
MercadoLibre is traditionally called the eBay of Latin America, and for good reason. To begin with, eBay is a top shareholder in MercadoLibre, with an 18.4% stake.. In addition, MercadoLibre operates as a commerce facilitator as opposed to an online retailer, and the platform offers not only typical products like electronics and apparel, but also big-ticket items such as cars and even real estate. 

MercadoLibre owns its own digital payments system, MercadoPago, which accounted for nearly 58% of all marketplace payment transactions on the platform as of the third quarter. In addition, MercadoLibre is expanding into areas such as logistics, financing, advertising, and back-end e-commerce solutions to build additional revenue sources and provide a top-quality experience to both buyers and sellers on the platform.

IMAGE SOURCE: MERCADOLIBRE. Mercadolibre tops the lists.

Perhaps most important, the company does not face the same competitive pressure from Amazon as eBay. MercadoLibre is the market leader in all of its main markets, and management calculates that nearly 28% of all Internet users in Latin America access MercadoLibre on a monthly basis. While it makes sense to expect Amazon to expand into Latin America in the future, MercadoLibre still has the first-mover advantage and the leading brand in the region. 

MercadoLibre offers extraordinary growth potential
Economic volatility and currency depreciations in Latin America can have a considerable impact on MercadoLibre's financials on a quarterly basis. However, the key variables show that MercadoLibre keeps firing on all cylinders in spite of macroeconomic turmoil in Latin America. 

Net revenue during the third quarter grew 14% in U.S. dollars and by a staggering 67.9% in local currencies. Nearly 34 million items were sold in the platform during the quarter, an annual increase of 26.2%. Total payment transactions were 22 million, jumping by 75.2% from 12.5 million in the third quarter of 2014. As of the end of the third quarter, MercadoLibre had 138.4 million users, growing by 20.1% year-over-year.

Even a mediocre company can do well when the wind is at its back, but it takes a particularly strong and well-managed business to deliver solid performance in times of economic hardship. MercadoLibre is leading the e-commerce revolution in Latin America, so the company is offering massive potential for growth through good and bad economic times.

Andrés Cardenal owns shares of and MercadoLibre. The Motley Fool owns shares of and recommends, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
$1,081.08 (4.71%) $48.61, Inc. Stock Quote, Inc.
$143.55 (2.07%) $2.91
eBay Inc. Stock Quote
eBay Inc.
$49.44 (1.79%) $0.87

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