The German outfit have undergone a major transformation in the last few months and following the retirement of Michael Schumacher, go into the new season with a highly impressive driver line-up of Lewis Hamilton and Nico Rosberg.
Since re-entering the sport, Mercedes have failed to finish higher than fourth in the standings but Lauda is tipping them for big things this time around.
"The cars are relatively close together," Lauda told Bild. "In my view, Vettel is the fastest at the moment.
"The Red Bull works well and looks reliable. He is a bit faster than the rest, but my joy is that Mercedes can now compete with the top three teams."