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Mercadolibre Inc (MELI) or eBay Inc (EBAY): Which Is a Better Pick?

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Mercadolibre Inc (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 Inc (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 Inc (NASDAQ:MELI) 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 Inc (NASDAQ:MELI)’s valuation is elevated considering its risks. It trades at a price to earnings (P/E) ratio around 55, while in comparison, eBay Inc (NASDAQ: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 Inc (NASDAQ:MELI), 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 Inc (NASDAQ:MELI) is not the only company with challenges. While Amazon.com, Inc. (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.com, Inc. (NASDAQ:AMZN) 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 Inc (NASDAQ: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.

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