Two Exciting Growth Stocks From Emerging Markets

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are different ways to look for high growth investment opportunities. Some industries or sectors are clearly more prone to disruptive innovation, and certain economic regions provide better possibilities for above-average economic growth. The tech business is a growth sector, and emerging markets is a high-growth region, so looking for the best tech companies in emerging markets sounds like a very interesting way to find stocks with the most exciting growth possibilities.

Mercado Libre (NASDAQ: MELI) is usually referred to as “the eBay (NASDAQ: EBAY) of Latin America”, since eBay owns an 18.4% of Mercado Libre and the two business models are quite similar. The company is the undisputed ecommerce leader in Latin America; it covers the whole region, from Mexico to Argentina, earning a big portion of its profits in Brazil, one of the most interesting countries for long term investors due to its growth prospects.

The company also owns a payment platform called Mercado Pago, which plays a similar role to the one PayPal plays for Ebay. Apart from being a trustworthy payment method for purchases via Mercado Libre, Mercado Pago is being expanded to other commercial operations outside the platform and becoming a payment system business in itself.

Owning a dominant position in a high-growth business with exposure to a promising region, Mercado Libre has been able to deliver and outstanding track record of growth over the years. Sales have increased at an annual compounded 42% in the last five years, while earnings per share grew at an explosive 161% annually. Mercado Libre is changing the way people shop in Latin America, and this makes it an exciting growth stock to consider for the long term.

The biggest risk for investors in Mercado Libre is competition. Ebay has been expanding in the region but, given the close ties between the two companies, this competition is likely to remain contained and friendly. Amazon (NASDAQ: AMZN), on the other hand, is a completely different story.

Amazon is rumored to be planning an entry into Latin America in the middle term, probably as soon as next year. This is no surprise at all considering the online retailer's aggressive expansionary ambitions; it’s only a matter of time until Amazon enters the region. Amazon is a tremendous competitor and it has the potential to materially affect the competitive landscape for Mercado Libre, but it won't have it easy in Mercado Libre's house.

Mercado Libre has the first mover advantage in Latin America, and local expertise is an important asset in the region. Cross-border tariffs and regulations make international selling much more complicated, and this means that Latin America is composed of different national markets instead of one whole unit like the US. Besides, Amazon should expect some considerable political opposition in Latin America if local retailers see their business threatened.

Competitive pressures against Mercado Libre will be on the rise in the next years, but the company has already built a huge international network and a very recognizable brand, so it has the tools to defend its markets and continue delivering superior growth.

Baidu (NASDAQ: BIDU) is the leading search engine in China, with a market share above 80% in that high growth market, the company is popularly known as the Google (NASDAQ: GOOG) of China since both companies have very similar business models. Just like Google, Baidu makes most of its money from online advertising, but the company has built a wide range of services around that business: multimedia, games, collaboration and social media are some of the areas the company has identified as future growth opportunities.

Google left China in 2010 due to conflicts with the Chinese government over censorship issues, and this gave a big boost to Baidu by eliminating the undisputed global leader from its home market. Google announced last month that it will be closing its Chinese music search business, so it doesn't look like the company and Chinese authorities are becoming friendly again anytime soon.

Shares of Baidu have been suffering lately: Various analysts have been making negative comments about the stock based on things like the company's ability to adapt to mobile, the possible effects of the Chinese economic slowdown, or increasing competitive pressure from smaller players. This negativity brought the stock to historically low valuations. Baidu is trading at a P/E below 29, a similar level to the one it had during the 2009 financial crisis.

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Every investment has its risks, and Baidu operates in a very dynamic and changing environment. Also, the regulatory framework in China is always a source of uncertainty, but the company has been able to adapt to different challenges in a very successful way; Baidu has delivered a compounded annual growth rate in sales of almost 77% annually over the last five years, while earnings grew at an even faster 85.5% in the same period. Pessimism creates opportunity, and the current low valuation looks like a good entry price for this high-growth Chinese stock.

When looking for extraordinary growth opportunities, two growth drivers are better than one. Mercado Libre and Baidu are adapting successful and proven disruptive business models to geographies with attractive long term potential, and this makes them exceptionally strong companies to consider.


acardenal owns shares of Google, Amazon and Mercado Libre. The Motley Fool owns shares of Amazon.com, Baidu, Google, and MercadoLibre. Motley Fool newsletter services recommend Amazon.com, Baidu, eBay, Google, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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