Is MercadoLibre Amazon-Proof?

Markets Motley Fool

MercadoLibre (NASDAQ: MELI) is Latin America's e-commerce giant, but the company hasn't yet had to face much competition from the likes of Amazon (NASDAQ: AMZN) or Alibaba.

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In this Industry Focus: Tech segment, Motley Fool analyst Dylan Lewis and contributor Danny Vena discuss how the company is trying to hedge itself against potential competition from some of the biggest companies in the world.

A full transcript follows the video.

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This video was recorded on June 23, 2017.

Dylan Lewis: They also seem to face one of the issues that no one can escape if you're in retail, which is the looming threat of larger players. In this case, Amazon and Alibaba are probably the two big names. Maybe you could toss Wal-Mart and eBay in there as well.

Danny Vena: That's true. If you look at their largest markets, Amazon has not really established a presence in many of them. They have been in Latin America for several years now. In Mexico, Amazon is the No. 9 most visited website. In Colombia, it's the No. 5 most visited website. Venezuela, No. 3. Fortunately for investors in MercadoLibre, they are still the No. 1 or No. 2 most visited e-commerce website in the majority of countries where they operate. Now, MercadoLibre is actually doing a few things that will help keep Amazon at bay. One of those is, in the past, it has experimented with free shipping at various times of the year, slower times of the year, to boost sales. Most recently, they rolled out free shipping as a test in Mexico. And it was so successful that they're now rolling out free shipping in Brazil, which is their largest market. So if you make a purchase on the website, you spend more than $40, you're going to get that shipping for free, and the majority of the time, that shipment comes within two days, which directly competes with Amazon Prime.

Lewis: It's nice to see them rolling these things out that make their offering more comparable. I think another thing to walk back some concerns about the looming competitive threats is, we talked about how logistically difficult some of these Latin American markets can be. If you're talking about a more fragmented continent and working in all these different currencies, those provide some barriers on the e-commerce side that you don't see in some other tech businesses. You look at a Netflix, and it's a lot easier for them to scale a totally digital platform out to 190 countries basically at the flip of the switch, and then they can localize content after the fact. With Amazon, with the nature of retail and delivery, it's a little tougher to do that. So I think that, in some ways, insulates Mercado from competitive pressure. But it's certainly something that I think over the next five to 10 years that people need to be mindful of.

Vena: Absolutely. If you look at the rest of the world, particularly in Asia, Alibaba has a lot of offerings that are very similar to Amazon. Both of them are very e-commerce oriented. So you'll want to keep an eye on them, because as we've seen in the news the last few weeks, I don't think there's any corner of retail that you can say is safe from Amazon coming in and stealing market share. So it is something to watch.

Lewis: Yeah, they do seem to be intent on coming in and grabbing everything they can. Another thing to put some concerns at ease here, I think e-commerce penetration for retail at this point in Latin America is about 3%. So there might be many winners of that trend in that market. I don't think it is necessarily a winner-take-all market anytime soon. That might change a decade out. But at least for now, there's plenty of room for growth, particularly as Mercado is the main player there.

Danny Vena owns shares of Amazon, MercadoLibre, and NFLX. Danny Vena has the following options: short December 2017 $75 calls on WMT, long January 2018 $57.5 calls on WMT, long January 2018 $55 calls on WMT, short December 2017 $75 calls on WMT, long January 2019 $18 calls on eBay, and short October 2017 $34 calls on eBay. Dylan Lewis owns shares of Amazon and MercadoLibre. The Motley Fool owns shares of and recommends Amazon, eBay, MercadoLibre, and NFLX. The Motley Fool has a disclosure policy.