Alibaba Group Holding Ltd (BABA) and MercadoLibre, Inc. (MELI) are two of the world’s biggest e-commerce platforms. While BABA operates mainly in China, MELI operates primarily in Latin America. With people spending more time at home, online traffic at these two e-commerce platforms has gone up dramatically. Moreover, ahead of the holiday season, both BABA and MELI are expected to witness a significant rise in buying and selling on their platforms.
Both stocks have generated significant returns over the past five years. While BABA returned 214.3% over this period, MELI gained 1,111.9%. In terms of year-to-date performance, MELI is a clear winner with a 166.1% return versus BABA’s 24.5% gain. But which of these stocks is a better pick now? Let’s find out.
BABA held the 11.11 Global Shopping Festival from November 1st to November 11th. Around 250,000 brands participated in the event. The 11-day campaign generated $74.1 billion in gross merchandise volume (GMV), up 26% year-over-year.
The company entered into a global agreement with Farfetch and Richemont on November 5th to accelerate the digitization of the luxury industry. BABA is to launch the Farfetch luxury shopping channels on Tmall Luxury Pavilion and Luxury Soho.
Earlier last month, Cainiao Aeropolis eWTP Hub, a joint venture between BABA and Malaysia Airports commenced operations that are expected to help facilitate 24-hour delivery within Malaysia. The company signed a Memorandum of Understanding (MoU) in October for a strategic partnership with BMW.
MELI is building a data lake called MeliLake by leveraging Amazon Simple Storage Service and Amazon EMR of Amazon.com, Inc. (AMZN), in order to transform itself into a data-driven company. This in turn is expected to help deliver a better customer experience. The company is also using Amazon Web Services (AWS) to drive growth in its payment platform, Mercado Pago, and credit line, Mercado Credito.
The company has also been expanding into content and groceries. It launched a partnership with Walt Disney Company (DIS). MELI also boosted its presence in Brazil last month as it announced the opening of five logistics hubs throughout southeastern Brazil, in order to accommodate a rapid shift to online shopping during the coronavirus pandemic.
In addition, the company received approval from the Brazilian central bank to further expand into the credit market in Brazil.
Recent Financial Results
BABA’s total revenue surged 30.3% year-over-year to $22.8 billion for the quarter that ended September 2020, primarily driven by growth in its core commerce segment.
BABA’s core commerce revenue increased 29.3% year-over-year to $130.9 billion. The company’s cloud computing segment increased 60.4% year-over-year to $2.2 billion. For the twelve months that ended September 2020, annual active consumers increased 9.2% year-over-year to 757 million. The company’s EPS of $2.73 surpassed the consensus estimate by 27.6%.
MELI’s net revenues increased more than 85% year-over-year to $1.1 billion for the third quarter that ended September 2020. Gross merchandise volume (GMV) increased more than 62% year-over-year to $5.9 billion. Unique active users increased 92.2% year-over-year to 76.1 million. The company’s EPS of $0.28 surpassed the consensus estimate by 64.7%.
Past and Expected Financial Performance
BABA’s revenue grew at a CAGR of 43.7% over the past 3 years. The market expects the company’s revenue to increase 61.6% for the quarter ending December 2020, 46.5% in 2021, and 30.9% in 2022. BABA’s EPS is expected to grow 54.2% for the quarter ending March 2021, 36.1% in 2021, and 20.5% in 2022. Moreover, its EPS is expected to grow at a rate of 3.8% per annum over the next five years.
On the other hand, MELI’s revenue grew at a CAGR of 43.9% over the past 3 years. The market expects MELI’s revenue to increase 74.3% for the quarter ending December 2020, 66.5% in 2020, and 36.3% in 2021. The company’s EPS is expected to grow 209.1% for the quarter ending March 2021, 138.3% in 2020, and 127.5% in 2021. Moreover, MELI’s EPS is expected to grow at a rate of 20.5% per annum over the next five years.
Thus, MELI has an edge over BABA here.
BABA’s trailing-12-month revenue is 25.93 times what MELI generates. However, MELI is more profitable with a gross margin of 51.7% versus BABA’s 43.8%.
Also, BABA’s ROA of 4.71% compares favorably with MELI’s 1.03%.
In terms of forward P/E, MELI is currently trading at 862.95x, much more expensive than BABA, which is currently trading at 25.66x. Moreover, MELI is more expensive in terms of trailing-12-month P/S (22.78x versus BABA’s 8.21x), and its forward PEG of 14.61x is also higher than BABA’s 1.21x.
In terms of trailing-12-month price/cash flow as well, MELI’s 75.42x is higher than BABA’s 23.89x.
Though MELI looks much more expensive compared to BABA, it’s worth paying this premium considering MELI’s significantly higher earnings growth potential.
While BABA is rated “Neutral” in our proprietary POWR Ratings system, MELI is rated “Strong Buy”. Here’s how the four components of the POWR Ratings are graded for both these stocks:
BABA has a “C” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. It is currently ranked #32 out of 115 stocks in the China industry.
MELI holds an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #5 out of 59 stocks in the Internet industry.
Both BABA and MELI are good investment bets considering their market dominance and continued expansion. However, MELI appears to be a better buy despite trading at a higher valuation based on its higher earnings growth potential.
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MELI shares were trading at $1,510.46 per share on Wednesday afternoon, down $11.20 (-0.74%). Year-to-date, MELI has gained 164.09%, versus a 15.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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