MercadoLibre Shares Take a Hit on Fears That Amazon Is Moving South

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser, Supernova and Rule Breakers' David Kretzmann, and Motley Fool Hidden Gems' Andy Cross discuss the rising speculation that (NASDAQ: AMZN) is preparing to enter Brazil, the most populous nation in South America. It's the biggest single market for MercadoLibre (NASDAQ: MELI), and would be a beachhead for the U.S. giant to make further inroads into its territory. But there's reason to believe that MercadoLibre can beat Amazon in the markets where it already dominates the online retail scene.

A full transcript follows the video.

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This video was recorded on Oct. 13, 2017.

Chris Hill: MercadoLibre is often referred to as the Amazon of Latin America. Shares of MercadoLibre fell 12% on Thursday on reports that the Amazon of the United States may be expanding its presence in Brazil. What do you think, David?

David Kretzmann: The funny thing here is, this shouldn't be all that surprising. These rumors have been floating around, even from the same Brazil publication, since the summer. So, in June is reported the Amazon Marketplace might be coming to Brazil in the future months. Another publication, the Brazil Journal, sort of speculated that would happen in 2018. So, this isn't anything brand new. But, obviously, any time you're going head-to-head against Amazon, potentially, that's something to have on your radar. But, we can actually look at a case study of how MercadoLibre has fared against Amazon looking at Mexico, where Amazon has operated for the past three years. MercadoLibre has been there since 1999, so they have a bit of a head start in Mexico and pretty much everywhere else in Latin America, including Brazil. But, over the past seven quarters, Mercado Libre's revenue has accelerated each quarter. That's despite Amazon ramping up its efforts there. Amazon rolled out Prime Mexico in March this year. Despite the competition from Amazon, MercadoLibre is still doing well in Mexico. And I think a key to that is they have that head start with that e-commerce ecosystem. They have a payments platform, MercadoPago, they have shipping and logistics through Mercado Envíos, a lot of other services that go into that marketplace ecosystem.

Jason Moser: Yeah, I got a few questions about this on Twitter. I think you have to look at it from the perspective of, you never want to dismiss competition from Amazon. They are formidable in virtually everything that they do. But by the same token, let's also not dismiss what MercadoLibre has built to this point using that very same blueprint, and also with a founder leader that is still very much invested in the company. Again, there's a lot to be said for getting that first mover status in that part of the world. And Brazil really is what is going to dictate a lot of that company's gains for the foreseeable future.

Kretzmann: Yeah, Brazil makes up almost half of Mercado Libre's revenue. But only 4% of total retail sales in Brazil come online. So, that's still a market that's growing very quickly as more people in the region get access to the internet and start buying things online. So, I don't even think it's a winner-take-all market. There's not going to be just MercadoLibre or just Amazon. I think there's room for both of them to compete.

Hill: Do you think part of what we saw with shares of MercadoLibre falling on Thursday has to do with the run that the stock has had, in the same way that Domino's has had this great run, so falling just short of perfect means some people are going to pull back?

Kretzmann: Yeah. The stock, even after this job, is trading for 10X trading sales. So, expectations are high. The valuation is at a premium. So, this kind of volatility should be expected.

Chris Hill owns shares of Amazon. David Kretzmann owns shares of Amazon and MercadoLibre. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.