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I’m avoiding Amazon shares in favour of this e-commerce growth stock

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The Amazon (NASDAQ: AMZN) share price has fallen significantly of late and is now around 10% off its recent high. For many, this signals the perfect time to buy. But I still have a number of doubts, which is why I’m choosing another e-commerce growth stock instead.

Why am I avoiding Amazon shares?

There were a number of positives to take away from Amazon’s latest trading update. Indeed, in comparison to last year, sales were up 27% to over $113bn. Net income also increased by over $2bn. But despite these strong results, the Amazon share price fell by around 8%. So, what are the reasons for this?

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In the company’s third-quarter guidance, it expected that net sales would be between $106bn and $112bn. This represents far slower growth than it has previously achieved, and investor confidence was dampened as a result. I feel that the reopening of physical stores is also likely to cause a slowdown in this growth. This is a slightly worrying sign for any growth stock.

Accordingly, I believe that there is now little upside to the Amazon share price. In fact, the company has a high price-to-earnings ratio of over 50. This indicates that Amazon shares may be overvalued, especially if growth is starting to slow down. So, while many investors are using the company’s recent dip to buy shares, I’m staying away.

The e-commerce growth stock I’d buy instead

MercadoLibre (NASDAQ: MELI) is an e-commerce company that operates within Latin America. The company performed particularly strongly in 2020, with revenues of nearly $4bn. This is around 75% higher than 2019.

But even as physical stores open up, growth is showing no signs of slowing down. In fact, in yesterday’s second-quarter trading update, the company saw revenues of $1.7bn, up 102.6% year-on-year. The number of active customers also grew by nearly 50% to reach 76m. Unlike many other tech companies, MercadoLibre also posted a profit, and net income was $68.2m. These are all extremely promising signs for a growth stock and the MercadoLibre share price was able to rise over 10% on the day.

In comparison to Amazon, I also feel there is more room for future growth. For example, Latin America is still a fairly underpenetrated market, and e-commerce is growing at a rapid pace. As MercadoLibre is the market leader in the area, it seems a prime beneficiary. Furthermore, I am also impressed by the company’s expansion into fintech over the past few years, with Mercado Pago. In the recent trading update, fintech revenues were able to rise around 90% year-on-year to $588m. This gives the company another dimension, and I feel that it will be able to propel growth.

One risk with MercadoLibre is its current valuation, however. In fact, it currently trades with a price-to-earnings ratio of over 500, demonstrating that future growth is already priced in. If the company disappoints on this, the share price is set to fall rapidly.

But so far, the company is excelling, and I believe profitability should increase over the next few years. This is why I initially bought this e-commerce growth stock, and after these earnings, I’m tempted to add more to my portfolio.

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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. Stuart Blair owns shares of MercadoLibre. The Motley Fool UK owns shares of and has recommended Amazon and MercadoLibre. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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