Coupang is close to its all-time low; Is it time to buy?
South Korean e-commerce company Coupang (NYSE: CPNG) has grown dramatically, but despite its dominance, the stock is close to all-time lows. The company has growth opportunities ahead, but it will have to overcome significant hurdles to achieve its international goals.
Its low valuation and potential growth areas make Coupang an investment with many risks, but if successful it could reward shareholders generously over the next five years.
Its domination in South Korea
Since its establishment in 2010, Coupang has grown into the largest e-commerce product company in South Korea. Since 70% of its customers are only 11 kilometers from one of the company’s logistics centers and have a delivery fleet of over 15,000 full-time drivers, Coupang has been able to standardize same day delivery or next day delivery. One hundred percent of orders are delivered the next day or sooner. It even has Dawn Delivery, where orders placed before midnight are delivered at seven in the morning the next day, which blows AmazonPremium two-day delivery out of the water.
Timeliness of delivery and customer satisfaction have helped the company increase revenue by 50% for 12 consecutive quarters to $ 4.5 billion, which grew 71% year-over-year in the second quarter of 2021. The company increased its customer base to over 17,000 in the second quarter (representing a 36% growth) while increasing net income per customer from $ 194 to $ 263 year over year.
The company continues to gain importance in South Korea, even though it is already a major player in e-commerce. This leadership position could allow it to grow alongside the country’s e-commerce market as a whole, which is expected to grow 10% annually, from $ 128 billion in 2019 to $ 206 billion by 2024. Currently achieving $ 15.7 billion in 12-month sales, Coupang has only 10% of Korea’s e-commerce market share in 2021. The e-commerce market is highly fragmented; Coupang and eBay (NASDAQ: EBAY) each controls 10% of the market. The difference between Coupang and eBay, however, is that Coupang is growing much faster than eBay, which grew revenue by just 2% year-over-year in its most recent quarter.
The business is not profitable and the company’s margin profile is not pretty. The gross margin in the second quarter of 2021 was only 15%, and the company spent 178% – over $ 1.1 billion – of gross profit on operating expenses. Coupang reported a net loss of $ 813.6 million in the first six months of 2021, but nearly $ 300 million came from expenses due to a warehouse fire. Apart from that, the company was still showing a net loss of $ 530 million, and its free cash flow was negative $ 183 million, even after taking over the expenses related to the fires.
The day it started trading in March, stocks jumped 81% to $ 63.50, but since then stocks have steadily fallen to the high range of $ 20. What may bring stocks down is the fact that the company saw 74% and 71% revenue growth for the first quarter and second quarter of the year. While 70% growth is ideal for any business, it is slower than the 90% growth it experienced in each quarter of 2020.
Due to falling prices and strong revenue growth, the valuation of the company has become very attractive: in early April, the company was trading at 6.8 times 2020 sales, and now it is trading at just 2 , 6 times sales over 12 months.
This valuation is particularly attractive for a leading company on the Asian market. Compared to Limited sea – which trades at 25 times sales over 12 months – Coupang offers a much lower price for a market leader in a rapidly growing geography.
Where does Coupang go from here?
Coupang’s low valuation could also be due to skepticism about the extent of growth to come. While there is good market growth in South Korea, this alone will not allow Coupang to maintain 70% growth. On the contrary, investors want it to develop internationally.
Coupang hinted at expansion plans in Singapore and Japan. The company will face fierce competition in both regions, namely from Sea Limited in Singapore and Amazon in Japan. Sea Limited has a strong hold over Singapore and the rest of Southeast Asia, so much so that it has been able to grow and experience great success across the ocean in Brazil, while maintaining its dominance over its territory. Amazon and Rakuten controlled 38% of the combined e-commerce sales in 2020 in Japan, so striving for prominence there will also be a difficult task.
While Coupang’s customer service and speed are unmatched, the company will face tough competitors if it is to continue its strong growth. Investors should watch its performance in Singapore and Japan, and if it manages to gain market share there, then the company could experience strong and sustained growth for many years to come. As of now, international success is still in the air, and until Coupang can prove its worth outside South Korea, investors may want to watch and wait before buying shares. .
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.