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Better Buy: Baidu vs. MercadoLibre

Investors looking for overseas growth are likely familiar with Baidu (NASDAQ: BIDU), which owns the top search engine in China, and MercadoLibre (NASDAQ: MELI), the biggest e-commerce player in Latin America.

But over the past five years, Baidu's stock slumped nearly 40% as it struggled with tougher competition, tighter ad regulations, and China's economic slowdown. MercadoLibre's stock soared roughly 450% as it dazzled investors with its robust revenue growth.

MercadoLibre has clearly been the better investment, but past performance never guarantees future gains. Will the Latin American e-commerce giant continue to outperform China's tech titan? Let's take a closer look at both companies to find out.

Image source: Getty Images.

How do Baidu and MercadoLibre make money?

Baidu generated 73% of its revenue from online ads last quarter. The rest mainly came from its streaming video unit iQiyi (NASDAQ: IQ), which was spun off in an IPO nearly two years ago. Less than 2% of its revenue come from other projects like cloud services and smart speakers. Nearly all of its revenue comes from China.

MercadoLibre generated 52% of its revenue from commissions and shipping fees in its "enhanced" marketplace last year. The remaining 48% came from "non-marketplace" businesses like ad sales, classified fees, payment fees, and other services. MercadoLibre operates in over a dozen countries, but its three largest markets are Brazil, Argentina, and Mexico -- which accounted for 63%, 19%, and 13% of its gross billings, respectively, last quarter.

Which company is growing faster?

MercadoLibre easily outpaced Baidu in terms of revenue growth over the past year.

YOY revenue growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Baidu

27%

22%

15%

0%

5%*

MercadoLibre

62%

93%

102%

91%

84%

YOY = Year-over-year. Source: Company earnings reports. *Estimated.

Baidu's revenue growth decelerated as China's economic slowdown curbed ad spending and Gen Z-oriented competitors like ByteDance's TikTok and Bilibili gained ground. It also faced competition from Sogou, Alibaba's Shenma, and integrated search engines in rival apps like Tencent's WeChat and ByteDance's Toutiao.

Macro headwinds like the U.S.-China trade war, the economic slowdown, and the novel coronavirus outbreak exacerbated that pain. However, Baidu unexpectedly raised its fourth-quarter guidance in early February, which suggests that the worst might be over. Analysts expect Baidu's revenue to rise 11% in 2020.

Image source: Getty Images.

MercadoLibre's gross billings continued growing across all of its markets. Its gross merchandise volume (GMV), or the value of all goods sold across its platform, rose 40% annually last quarter as its total payment volume (TPV) surged 99%. Its total number of unique buyers rose 18% annually to 44.2 million for the full year.

MercadoLibre doesn't face as much competition as Baidu. Amazon (NASDAQ: AMZN) is trying to expand into Brazil, but it still hasn't gained much ground against MercadoLibre's entrenched position. Wall Street expects MercadoLibre's revenue to rise 37% this year.

Which company is more profitable?

Baidu's ad revenue has declined annually over the past two quarters. It offset those declines with the growth of iQiyi, but the streaming video platform's ongoing losses reduced its operating margins. It exacerbated that pressure with higher investments in its AI platform, DuerOS voice assistant, smart speakers, and driverless car projects.

Despite all those headwinds, Baidu remains profitable on a non-GAAP basis. It also expects its profitability to improve alongside its rebounding revenue growth, and analysts anticipate 26% earnings growth next year -- which is a high growth rate for a stock that trades at just 18 times forward earnings.

MercadoLibre isn't consistently profitable, mainly due to free shipping subsidies and higher tax expenses. Its net loss widened from $36.6 million in 2018 to $172 million in 2019, but analysts expect those losses to gradually narrow in 2020.

MercadoLibre's lack of profits makes it tougher to value than Baidu, but it trades at 11 times this year's sales -- which is a lofty valuation compared to other e-commerce companies. Amazon and Alibaba trade at 3 and 8 times this year's sales, respectively, and both companies are consistently profitable.

The better buy: Baidu

Baidu faces fierce headwinds, but its revised fourth-quarter forecast indicates that it's overcoming some of those challenges amid the ongoing coronavirus crisis. The stock is also historically cheap relative to its growth.

MercadoLibre is still a promising growth stock, but it trades at a premium valuation and its aggressive free shipping subsidies will throttle its earnings growth for the foreseeable future. It's still a good speculative play, but Baidu remains the stronger overall investment for 2020.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Baidu, and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon, Baidu, Bilibili, MercadoLibre, and Tencent Holdings. The Motley Fool owns shares of Alibaba Group Holding Ltd. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.


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