With similar businesses serving large and underpenetrated markets internationally, we ask which of these stocks is a better buy today?
Sept. 15, 2021
These two e-commerce operators have historically operated in two distinct geographical areas, namely Southeast Asia and Latin America. Despite being thousands of miles apart, both regions have a population upwards of half a billion, are largely underbanked with low e-commerce penetration rates, and have a growing middle class. This leaves an enormous opportunity for growth, and as Sea Limited (NYSE: SE) encroaches on MercadoLibre‘s (NASDAQ: MELI) core market in Latin America, we ask which company is a better buy?
Sea Limited: Bull vs Bear arguments:
Sea Limited’s mission is “…to better the lives of consumers and small businesses with technology”. The company currently operates three main divisions, Garena in digital entertainment, Shopee in e-commerce, and SeaMoney in digital financial services.
Sea Limited has significantly benefited from the shift to digital brought on by COVID-19. However, this growth does not appear to be slowing down, and in Q2 2021, revenue surged by 158.6% year-over-year (YoY) to $2.3 billion.
Garena is Sea’s oldest segment and continues to fuel growth with bookings of $1.2 billion and revenue of $1 billion, a 166% increase YoY in Q2. It has 725 million quarterly active users and 92 million paying users, up 85% YoY. Its hit game ‘Free Fire’ continued to be the highest-grossing mobile game in Southeast Asia, Latin America, and India in the quarter. Furthermore, Sea Limited also has the right of first refusal to games to be published in several countries by Tencent, a major shareholder.
Despite Shopee being launched in 2015, the e-commerce division is now the largest by revenue with $1.2 billion in Q2, an increase of roughly 161% year-over-year (YoY). Shopee is a leading e-commerce platform in Southeast Asia and continues to fend off competition from Alibaba‘s Lazada. Shopee was also recently launched in Brazil, where performance has been strong, and management views this as a large opportunity due to the “very low level of e-commerce penetration.
Its smallest segment is digital financial services which continue to perform well as adoption and the number of use cases increases. SeaMoney reported a 150% growth in total payment volume (TPV) to $4.1 billion.
Despite the stellar growth, the company is still operating at a loss which widened to $434 million in Q2. The company also faces major competition in its different segments from other e-commerce giants, payment companies, and more. In particular, Garena faces competition from other video game developers, and its reliance on ‘Free Fire’ is a cause for concern.
MercadoLibre: Bull vs Bear arguments:
MercadoLibre is undoubtedly the e-commerce king in Latin America, with operations in 18 countries. As well as this, it has a payments division MercadoPago, a logistics network, and more.
According to management, the pandemic has provided the backdrop for “sustained long-term growth throughout the region” in digital services. Market research company eMarketer also stated that Latin America is the leading area for e-commerce sales growth, almost 10% higher than the global average. MercadoLibre is perhaps the most well-positioned company to benefit from this trend. It continues to drive customer engagement and retention, with unique active users reaching 75.9 million in the quarter.
In Q2, 2021, MercadoLibre reported revenue growth of 93.9% YoY, reaching $1.7 billion despite tough comparables with record levels in volume and revenues. E-commerce revenue accounted for roughly two-thirds of revenue, with gross merchandise volume (GMV) growing to $7.7 billion, equating to a 39.2% increase.
Its fintech business was initially introduced to supplement its e-commerce division. However, it is now widely used in shops across the region as well, surpassing $17.5 billion in TPV, a 56% increase YoY in Q2 and is an exciting area for growth. The company is also profitable, with a net income of $138.9 million.
MercadoLibre continues to expand its logistics network much like Amazon has done and shipped 230.5 million items in the quarter. This creates benefits such as less reliance on local postal services, which can lower costs and create loyal customers and merchants with free shipping.
One significant risk is the region’s political instability, which previously forced the company to halt its operations in Venezuela. It also faces increased competition from other e-commerce companies, most notably Sea Limited, which may drive higher costs and affect profitability and margins.
So, which stock is a better buy right now?
MercadoLibre appears to be a better buy today due to its dominance in Latin America and given that it is a more established business. It provides investors with less execution risk than Sea Limited but considerable upside potential.
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