MercadoLibre Is Beating Amazon in 1 Important Category in Latin America. Here's Why Investors Should Take Note.

There's a clear heavyweight advertising champion in Latin America, and it's not even particularly close: MercadoLibre (NASDAQ: MELI) is trouncing Amazon (NASDAQ: AMZN) in this category. One research group predicts the former's advertising business will continue to skyrocket over the next few years, as I'll explain. And it shouldn't come as any surprise to anyone who knows how retail media works.

MercadoLibre has multiple segments. But one of its biggest and best is its e-commerce platform. Like Amazon in the U.S., MercadoLibre has the largest platform in many countries in Latin America, including Brazil, allowing third-party retailers to sell products to a large, captive audience.

For perspective on the scale, MercadoLibre had nearly 54 million people buy something from its e-commerce marketplace in the first quarter of 2024, which was up 16% year over year. These are people navigating to the platform and spending time on there searching around. Advertisers would love to get in front of that audience.

In the U.S., the same is true of advertisers with Amazon. The company has multiple ways to generate ad revenue, so it's not all attributable to the e-commerce platform. But if we rewind the clock back to the first quarter of 2021, Amazon generated $6.4 billion in ad revenue, which was impressive enough. But in Q1 2024, it had $11.8 billion in ad revenue -- up more than 80% in just three years, demonstrating clear advertiser demand.

There are millions of people browsing Amazon everyday with the intent to buy something. That's attractive for advertisers. All the company had to do was sell spaces on its platform for advertisers to promote their products and services -- a high-margin proposition for Amazon. And it's something that's increasingly important for MercadoLibre.

How fast is MercadoLibre's advertising segment growing?

According to management, MercadoLibre's advertising business equaled 1.9% of its gross merchandise volume in the first quarter of 2024. Considering it had gross merchandise volume of nearly $11.4 billion, this translates into Q1 advertising revenue of roughly $216 million. This was up a whopping 64% year over year.

One of the most respected research groups for advertising is eMarketer, and it expects MercadoLibre's advertising growth to continue to impress. This year, eMarketer believes MercadoLibre will generate advertising revenue of over $1 billion for the first time. But by 2026, it expects the e-commerce giant will produce advertising revenue of nearly $2 billion.

According to eMarketer, MercadoLibre has a roughly 50% market share for retail media (advertising slots sold by retailers) in Latin America. Amazon is next, with about one-quarter of the market. But given that MercadoLibre is the bigger player, it's logical that it would be the more in-demand platform for advertisers.

It's impossible to tease out the exact benefit that advertising brings to MercadoLibre's financials. But over the last three years, as advertising revenue has soared, the company's operating income is growing much faster than revenue. And this improved profitability with growth is exactly what investors want to see.

MELI Revenue (TTM) data by YCharts

Can MercadoLibre stay on top?

When thinking about its advertising revenue potential, the question to ask is whether MercadoLibre can remain the dominant player in its markets. I believe it can for multiple reasons.

The first thing to consider is MercadoLibre's network effect . There are roughly 12 million sellers using the e-commerce platform. As its base of active buyers keeps growing, the opportunity for sellers increases, which could attract even more sellers. If new sellers bring new products, it could in turn attract new buyers. As the largest player in the region, this network effect is stronger for MercadoLibre than others.

Another thing to consider is MercadoLibre's impressive logistics network. The company made 115 million same-day or next-day shipments in Q1 alone. In this part of the world, this speed and scale is hard to beat and can be a competitive advantage . In other words, shoppers will buy from this platform because of how speedy its service is.

For these reasons, I believe MercadoLibre will stay at the top of the e-commerce game in Latin America. Digital advertising is spreading in the region, making its platform a top choice for advertisers. I consequently believe that the company will keep growing this lucrative advertising revenue stream in the coming years. And if eMarketer is right, advertising revenue could double for MercadoLibre before 2027, which could help support a higher stock price.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has positions in MercadoLibre. The Motley Fool has positions in and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy .