Sunday, 5 November 2023
by Rose White
Amazon (NASDAQ: AMZN) has been one of the best-performing stocks of the past generation.
Against substantial odds, the company disrupted the retail sector and pioneered an entirely new business: cloud infrastructure. It now has two separate businesses that generate billions in profit.
However, while Amazon is now one of the most valuable stocks in the world, the stock’s performance hasn’t lived up to its historical track record. You might be surprised to learn that over the last five years, Amazon’s gains have only slightly outpaced the S&P 500, with the tech giant rising 60% during that time.
With its annual revenue now above $500 billion, the company is starting to run into the law of large numbers, making it difficult for it to maintain an elevated growth rate. To grow revenue by 20%, Amazon would have to add more than $100 billion in revenue in one year, which would be no small feat for any company.
That seems to be one reason why CEO Andy Jassy is focused more on cutting costs and squeezing profits out of existing businesses, rather than finding Amazon’s “fourth pillar,” or its next major business. It’s not easy to move the needle on the company’s top line at this point, especially with a new business. Additionally, the stock is still expensive based on traditional metrics. It trades at a price-to-earnings ratio of 71, meaning that high expectations are baked into the stock.
While Amazon remains a strong business, its upside potential seems limited at this point given its size, its market cap of $1.4 billion, and its demanding valuation.
Instead of buying Amazon, investors may want to consider another e-commerce stock that looks well-positioned to outperform it over the coming years.
MercadoLibre (NASDAQ: MELI) is a Latin American company that focuses on e-commerce. But, like Amazon, it also operates a range of other businesses, including fintech, credit, logistics, and asset management.
In fact, MercadoLibre has followed a similar playbook to Amazon in a different part of the world, using its market power in e-commerce to expand into higher-margin businesses. Over the last five years, MercadoLibre stock has gained nearly 300%, easily beating Amazon.
The strength of MercadoLibre’s business model was on display in the third-quarter earnings report on Wednesday. Gross merchandise volume jumped 59.3% on a currency-neutral basis to $11.4 billion, while total payment volume soared 121.2% on currency-neutral terms to $47.3 billion. As a result, revenue in the quarter rose 69.1% in constant currency to $3.76 billion, easily beating the consensus at $3.56 billion. What’s particularly impressive about that e-commerce growth is that it’s come at a time when nearly every other e-commerce business is struggling in the wake of the pandemic.
Much like Amazon’s has in recent years, MercadoLibre’s profitability is exploding thanks to fast-growing businesses like its fintech arm MercadoPago, its third-party marketplace, advertising, and its credit business. In the quarter, its operating income jumped 131% to $685 million. Earnings per share were up 180%, nearly tripling, to $7.16, well ahead of estimates at $5.86.
One of the bright spots in the quarter was a pickup in originations of its credit products in Brazil, as the company began to offer larger and longer loans and its delinquency rate remained low. Advertising revenue grew by at least 70% on a currency-neutral basis for the sixth quarter in a year, reaching nearly $200 million in the quarter.
The company also relaunched its Amazon Prime-like loyalty program called Meli+. It features similar perks to Prime, including free shipping on millions of products, free subscriptions to Disney+ and Star+, and free music streaming from Deezer.
After its latest earnings report, MercadoLibre is actually cheaper than Amazon. It’s trading at a price-to-earnings ratio of 66.5, and it’s growing much faster on both the top and bottom lines.
Additionally, there’s considerably more upside potential to the stock, as its market cap is just around 5% of Amazon’s today.
While Amazon itself isn’t a bad stock to own right now, MercadoLibre offers many of the same characteristics that made Amazon stock such a big winner, but at an earlier stage in its life cycle and at a lower price. You might like Amazon, but MercadoLibre could truly earn you life-changing returns.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon and MercadoLibre. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.