- E-commerce sales have accelerated amid the pandemic this year, with some markets even reporting triple-digit percentage growth from 2019.
- Despite the growth, digital commerce in emerging markets like Latin America and Southeast Asia accounts for a tiny fraction of total retail trade.
- For investors looking for long-term potential, smaller players in the industry like Free Mercado, Limited sea, and Farfetch Limited keep a lot of promises.
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As the world fights COVID-19 with social distancing and remote working, the growth of e-commerce has accelerated. Long-time leaders of the movement, Amazon and Ali Baba, were big winners in their respective fields in the United States and China.
But in the massive global retail space that encompasses more than $ 23 trillion a year in consumer spending, there is more than enough room for other players to thrive. Free Mercado (NASDAQ: MELI), Limited sea (NYSE: SE), and Farfetch Limited (NYSE: FTCH) each deserve some attention following the third quarter 2020 results.
1. MercadoLibre: Latin America still far behind in the race for the digital economy
E-commerce has matured in recent years in Latin America. Revenue from MercadoLibre, the region’s leading online retail marketplace and digital payments provider, has doubled several times over the past decade and topped $ 3.3 billion in the past 12 months.
However, earlier this year, the leadership of StoneCo – a leader in digital payments in Brazil and a peer at MercadoLibre – pointed out that e-commerce still only accounts for a mid-to-single-digit percentage of overall retail sales in Central and South America. So while MercadoLibre has grown into a heavyweight and currently has a market cap of $ 70 billion, there is no reason to believe its long winning streak is about to end.
It was on the big screen in the third quarter. The pandemic has dramatically accelerated online shopping trends and MercadoLibre has reaped the rewards. Active users increased 92% from a year ago and topped 76 million. The gross volume of goods sold increased 62% to $ 5.9 billion, and the total volume of payments processed by subsidiary Mercado Pago increased 92% to $ 14.5 billion. In total, this equates to revenue growth of 85%, with revenue reaching $ 1.1 billion.
It is also quickly becoming a very profitable business. Free cash flow (basic earnings measured as income less operating expenses and capital expenses) generated in the first nine months of the year was $ 766 million. That’s a dramatic increase from the $ 272 million generated over the same period in 2019 and good for a 29% free cash flow margin – not bad for a business that still emphasizes growth. in a rapidly changing industry.
The stocks are trading 21 times sales over 12 months and 87 times free cash flow at the time of writing, a high price to be sure. But given MercadoLibre’s early lead in what is still an emerging digital economy, there is plenty of room for the company to continue to grow at a rapid pace for years to come.
2. Sea Limited: Southeast Asia leader in all digital sales
Sea is also rapidly becoming a digital economic powerhouse dominating Southeast Asia – and it is also breaking into MercadoLibre’s territory in Latin America. The company debuted with its video game development platform (responsible for the title Battle Royale Free fire) as well as its online gaming service. From there, it branched out into e-commerce through its Shopee subsidiary and made some serious waves in what amounts to another region where online sales are still a very small minority of the grand total – from low percentages to a figure in some countries like Thailand, Vietnam and Malaysia.
Sea divides its results into two segments, and both have competed in races this year due to the new dynamics in consumer behavior brought on by COVID-19. Specifically in the third quarter, the “digital entertainment” video game division grew 73% year-on-year to $ 569 million, and “e-commerce and other services” (which also includes a fledgling payment processing company ) rose 173% to $ 619 million. In Indonesia, Shopee’s largest market, average daily orders increased 124% from a year ago to around 3.4 million, and the Shopee app remained # 1 in the shopping category. in Indonesia and Singapore. Interestingly, despite its geographic footprint, it was the second downloaded shopping app in the world, perhaps thanks to the company’s expansion into new regions like Latin America.
Incredible growth aside, one blow to Sea is its profitability. The gross profit margin on services rendered and products sold has only been 29% since the start of the year, compared to 46% for MercadoLibre. However, these are fluid metrics that will improve as Sea reaches a more efficient scale, especially in digital commerce.
Given the situation, Sea’s current 12-month price / sales ratio of nearly 25 is a higher price than MercadoLibre’s. Nevertheless, just like its South American counterpart, it is growing rapidly and has access to well over a billion potential consumers between Southeast Asia and Latin America in markets that have a long way to go. in the race for the digital economy. After another fantastic track record, Sea remains a buy for long-term investors.
3. Farfetch: Luxury sales rapidly pivot to online
2020 hasn’t just changed the way consumers shop for their basic items – it’s also had an effect in the luxury goods market. Even the sale of the most exclusive designer items is migrating to the internet, and the Farfetch luxury market is emerging as a major pioneer in this department. Shares are up more than 350% since the start of the year.
But things haven’t always been easy. After a very successful IPO at the end of 2018, Farfetch languished in 2019 and kicked off 2020 with a few rounds of convertible debt investments to raise cash – first raising $ 125 million each from the Chinese giant. of technology Tencent and San Francisco-based investment firm Dragoneer, followed by an additional $ 350 million in a more general private placement with institutional investors. It was a fortuitous moment. E-commerce has spread to encompass even traditionally conservative high-end shopping segments, and Farfetch is booming.
Specifically, third-quarter revenue climbed 71% year-over-year to $ 438 million, and although the company continues to lose money, it is moving towards breakeven . Adding to the optimism, a lucrative gross profit margin of 47.8% in the last quarter, down from 45.1% last year, as the highly profitable traditional luxury market keeps a similar promise online. Farfetch ended September with a vast war chest of $ 757 million in cash and cash equivalents, offset by debt of $ 469 million.
There is still a long way to go to bring high-end products to digital, but Farfetch believes a permanent change is emerging. Promising news on this front was a joint venture announcement with Alibaba and the Swiss luxury goods investment holding company. Financial Company Richemont to establish Farfetch’s market in mainland China, the world’s largest luxury goods market. Indeed, the future looks bright for this high-end consumer discretionary company.
Trading at 10.5x sales over 12 months, this stock could be a real boon in the years to come if its recent momentum can continue into 2021 and beyond, and the company makes further progress towards reducing its sales. losses. I am a buyer at these levels.