MercadoLibre or eBay: Which Is a Better Pick?

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

MercadoLibre (NASDAQ: MELI) is a popular e-commerce site in Latin America and a good play on their growing middle class. Still, valuation is an important part of the picture. Compared to similar competitors like eBay (NASDAQ: EBAY), MercadoLibre is expensive and carries a number of risks. eBay is not a small company anymore, but it has a number of qualities that make it attractive.

The bullish case
The bullish case for MercadoLibre is quite convincing. Latin America is growing a new middle class, even in countries, like Brazil, with a slowing economy. The growth of 3G and 4G wireless networks coupled with cheap Android smartphones is opening up the Internet and e-commerce to millions of new consumers.

The bearish case
MercadoLibre's valuation is elevated considering its risks. It trades at a price to earnings (P/E) ratio around 55, while in comparison, eBay trades with a P/E around 25. eBay's five-year revenue growth rate is only 11.98%. While MercadoLibre's smaller size and five year revenue growth rate of 26.78% help justify its higher valuation, there is a second part to the story.

Argentina and Venezuela are the second- and third-most important countries for MercadoLibre, based on consolidated net revenue. These countries are far from stable, and their fixed exchange rates make MercadoLibre's operation look better than it really is. The company is facing challenges in its Venezuelan operations, signaling that management is concerned. 

Argentina Economic Freedom Index data by YCharts

Venezuela is suffering from falling oil prices, and the growth of Canadian heavy oil in U.S. refineries. The recent death of Hugo Chávez throws a large amount of political instability in the mix. Argentina is struggling with an inflation rate many times higher than the official rate and falling hydrocarbon production. This macro instability makes the environment difficult for business, and it is difficult to tell what these governments will do next

MercadoLibre is not alone
MercadoLibre is not the only company with challenges. While Amazon.com (NASDAQ: AMZN) has relatively diversified operations, its falling profit margins and very high valuation are worrying.  It is easy to get excited about Amazon's cloud services or other new technologies, but a look at its bottom line is less inviting.

Europe is an important market for Amazon with 18 fulfillment centers between the U.K., France, and Germany. Europe's woes are hurting the bottom line, driving down the company's international quarterly operating income. With Germany's export machine winding down, this is not expected to change anytime soon.

Amazon trades at a price to sales (P/S) ratio around 2 with its profit margin of (0.2)%, while Wal-Mart trades at a P/S ratio around 0.5 with a 3.8% profit margin. Amazon's valuation is especially worrying, considering its year over year quarterly revenue growth has fallen to 22% and Wal-Mart's e-commerce push.

MELI Free Cash Flow Per Share data by YCharts

eBay is a better option
With a market cap of around $70 billion, eBay is not as nimble as MercadoLibre, but the U.S.-based company is an attractive investment. Its online marketplace is one of the staples of the e-commerce world, and PayPal is successfully moving offline into the payments market.

eBay has also had success with its mobile apps and cutting competitors like Google out of the equation. Instead of heading to a search engine and looking for an item, eBay's mobile apps allow consumers to start their search directly on eBay's platform, bypassing Google completely and placing more ad revenue in eBay's pocket. These changes are significant and paint an encouraging future, as more than 120 million users have downloaded the company's apps.

With a P/E ratio around 25 and a profit margin of 17.7%, eBay offers profits at a reasonable price. While it has some exposure to unstable nations in Latin America, its U.S. operations are a powerful driver and make it a more stable investment. 

Conclusion
MercadoLibre is an attractive company with strong growth, but its current valuation is too rich given the uncertainties it faces in Argentina and Venezuela. Amazon is a giant of the online world, but its low profits, falling free cash flow, and high valuation decrease its attractiveness. eBay is a better deal with a healthy profit margin, growing operations, and new ventures in the payments sphere. 

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and MercadoLibre. The Motley Fool owns shares of Amazon.com, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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