Coupang (“CPNG”) – The Investor Weekly Stock Report

Summary        
The Investor Weekly (TIW) is long Coupang (CPNG is officially pronounced “coo-pong”).

Think South Korea’s answer to Amazon. Think Alibaba. The company maintains end-to-end control over the supply chain and logistics that allow for exceptional same-day and next-day delivery.

CPNG has built the infrastructure and the technology nationwide to provide the best selection and the best service at a consistently low price, relative to competitors.

CPNG is gaining substantial market share and the growth runway in Korea remains substantial.

CPNG will likely expand its e-commerce platform to provide more comprehensive internet services; potentially entertainment or payments.

This is a high-quality company that is undervalued (NTM EV/S of 3.25x) given its potential for long-term sustained growth. However, EV/GP may be a better indicator of current and future valuation.

Past recommendations by The Investor Weekly, include stocks like SE and MELI, which have seen incredible results. Let’s take a look at the market opportunity, recent IPO and the core business, competitive positioning, risks, and valuation.

Company Overview
CPNG was founded in 2010 and made a name for itself by securing a top spot in Korea for same-day or next-day delivery service. The company is the leading B2C e-commerce platform in Korea and continues to take market share against the competition.

CPNG is like Amazon; it warehouses inventory and is vertically integrated, covering every part of the sales process from order to delivery, including payments and returns.

The company’s greatest competitive advantage is its fully integrated logistics and delivery operations. Coupang has the largest B2C network in the country. CPNG has more than 100 fulfillment centers and operates in 30 cities. CPNG was strategic in its location of these facilities; more than 70% of South Koreans live within 7 miles of a fulfillment center.

Coupang currently employs more than 15,000 drivers, which represents the largest delivery fleet in the country.

CPNG focuses on securing repeat customers with low, competitive prices. And brings economies of scale to secure buying power with vendors. Customers are offered a “Rocket WOW” membership for a monthly fee, and gain access to faster delivery on qualifying items. The service is essentially the equivalent of Amazon Prime. A huge selling feature of Rocket WOW is the ability for customers to elect a “Dawn Delivery” option for rapid next day delivery by 7am. The next day option effectively raises the purchase price and margin when compared to other e-commerce websites. More than 30% of the company’s active customers are subscribed to Rocket WOW.

Coupang has a variety of wholly-owned subsidiaries, effectively expanding the scope of its product and service offerings. CPNG is heavily used for groceries, including fresh produce, and for restaurant deliveries. “Rocket Fresh” and “Coupang Eats” are the largest services of their kind in the country. For Coupang Eats, the service accounts for nearly 20% of the food delivery market in Korea as of January 2021, almost a three-fold jump from August 2020. And the average number of users has increased 15-fold during 2020 to more than 460,000 users.

For the time being, however, Coupang Eats remains a slim-margin business, which does not yet contribute meaningfully to the financials.

CPNG has also moved into payments with “Coupang Pay”. This platform is a digital financial service akin to MarcadoLibre’s Mercado Pago and Sea Limited’s Sea Money.

The Investor Weekly believes that these subsidiaries will provide the catalyst for future growth.

Leadership
Bom Suk Kim is the founder of Coupang. Kim was capable of raising nearly $3.8 billion in venture capital and has a 9% economic interest in the company. He also controls 77% of voting rights via the B shares. Kim is a Harvard undergrad and later an HBS dropout.

Thuan Pham, CPNG’s CTO, has more than 7 years of experience as the former CTO of Uber.

Korea and E-Commerce
Korea has a population of roughly 52 million inside an area the size of Indiana, with most of the population clustered in cities. This dense population is relatively affluent and more than 95% of the population has internet access.

Korea’s economy is the twelfth largest in the world and has the sixth largest e-commerce market.

E-commerce was a $4.2 trillion dollar market in 2021. And it’s likely to top $7 trillion dollars globally by 2023. That is the equivalent of roughly 20 percent growth year-over-year. In the Asian-Pacific region, e-commerce sales are even higher, topping 30 percent year-over-year. In CPNG’s Registration Statement, the company states that total retail, grocery, foodservice and travel spent in Korea in 2019 was $470 billion and is expected to grow to $534 billion in five years. Furthermore, Korea’s 2020 e-commerce spend ratio is close to 29 percent; that is the equivalent of a $140 billion market opportunity.

The New York Times recently said that South Korea will be the third largest e-commerce market in the world by 2021. CPNG, at $12 billion in 2020 sales, holds less than 10% of the potential addressable market. There is tremendous room for growth when one considers that the Korean market could one day see 40 to 50 percent e-commerce penetration.

Check out the Future of E-commerce, by Shopify.
LINK: https://www.shopify.com/enterprise/the-future-of-ecommerce

Competition and Risks
CPNG’s most likely threat is from a company called Naver Corporation. Naver is Korea’s first Search Engine, having debuted in 1999, and is the Korean equivalent of Google. The company handles about 75% of all web searches in Korea and has more than 40 million active users. Naver, like Google, has multiple verticals including fintech, cloud computing, media, content and e-commerce.

Naver’s shopping took up 17 percent of the country’s internet shopping sales, ahead of CPNG’s 13 percent.

Naver does not currently have its own distribution network. However, the company announced in March of 2021 that it had partnered with Emart and CJ Logistics to grow its e-commerce business. Naver is keen on reinforcing Emart’s online SSG.com shopping mall delivery system. And CJ Logistics will allow expansion in product category and distribution network. The strategic alliance will accelerate Emart’s existing business by integrating both IT capacity and database. And Naver will expand its offline businesses such as its one-day and fresh food delivery services. Transactions at SSG.com had surged 37 percent year-over-year; Covid-19 played a huge part in this growth. The relationship with CJ Logistics distribution network will increase one-day delivery capabilities.

But will CJ Logistics be able to replicate what CPNG’s internal optimized delivery system has? It’s still too early to tell, but TIW believes replicating CPNG’s successful logistics strategy will take time and CPNG’s existing customers will remain sticky.

Gmarket, which was acquired by eBay in 2009, is another competitor worth considering. But Naver, in our mind, remains the primary competitor. There are several additional risks, beyond the competition posed by Naver, that CPNG will face as it continues to compete for market share. Firstly, macroeconomic headwinds in a post-covid world are likely to see a sales growth deceleration that may be sharper than management and analysts predict. Secondly, expanding beyond South Korea will pose a challenge for CPNG, especially in regions where Sea Group remains the dominant player.

Another risk worth mentioning is the ownership breakdown for CPNG. Institutions comprise less than 10% of the ownership base. VC/PE and Retail make up roughly 75%. SoftBank is the largest VC/PE backer and owns more than 35% of Coupang. Softbank has been noted for extending its influence over other investments including Grab Holdings. This outsized stake should be noted by investors. And while the $100 billion dollar Vision Fund continues to recover from a series of errors, CPNG is also backed by Sequoia Capital and BlackRock.

CPNG IPO
CPNG completed its IPO on the NYSE on March 11, 2021, attempting to raise $3.6 billion by pricing shares at $35. The company offered 120 million shares, which included 100 million new Class A shares and 20 million existing shares held by investors. There are roughly 1.7 billion shares outstanding after the IPO.

The stock popped at the open, traded up to $63.50, before closing at $49.20, giving the company a market capitalization of roughly $85 billion.

Before this offering, the company was last valued in a 2018 funding round at $9 billion.

Financials & Valuation see https://sec.report/Document/0001628280-21-004212/
CPNG recorded sales of $12.5 billion in 2020. Revenue increased 91% year-over-year, which highlights the company’s ability to take away market share from other e-commerce providers in Korea, as well as and brick and mortar retailers. Top line growth rates for the last five quarters are 90%, 94%, 95%, 93% and 74% (Q1 2021), respectively.

Operating cash flow was positive for 2020 and totaled $301.5 million.

Free cash flow generation and EBITDA margins continue to improve. This clearly shows that CPNG has been able to significantly improve its operating efficiencies as it has scaled up, brining the company closer to turning an operating profit in the future.

Revenue per active customer grew 59%, from $161 in 2019 to $256 in 2020. The numbers look to be higher this year, with growth rates continuing to remain in the high double-digits.

CPNG maintains a robust capex campaign. Capex for 2019, 2020 and TTM Q1 2021 were $214 million, $484 million and $562 million.

In light of the recent IPO, CPNG maintains ample cash on the balance sheet of $4.3 billion. And total current assets exceed total current liabilities by 1.6x. CPNG has a quick ratio of 1.2x.

Coupang recently reported Q1 2021 earnings. Shares of CPNG traded down by more than 10% after the company reported its earnings results from first quarter 2021 on May 12, 2021.

The company recorded a loss of nearly $295 million, down from a loss of nearly $105 million in the first quarter of 2019. EPS estimates were for ($0.15) per share, but missed by 53 cents. Of note, operating cash flow was negative this quarter, but management noted no change to the fundamentals of the business. The decrease was largely a result of an increase in spending to buildup inventories used to support higher sales volume and to expand available selection to customers.

Total revenue in the quarter grew roughly 74% year-over-year. Although top-line growth is incredibly strong, investors should expect to see some cooling off as the effects of the pandemic abate. For context, while the Korean e-commerce segment declined on a quarter-over-quarter basis, CPNG grew total revenue by 11%. Quarterly active customers grew 21% year-over-year in Q1 and revenue per active customer grew 44%.

CEO Bom Kim will continue to invest to strengthen its infrastructure, including $708 million to hire thousands of workers to continue to build logistics facilities in South Korea. The company is looking long-term and will sacrifice short term-profitability to reinvest in growth.

Valuing Coupang requires moving beyond the fact the company remains unprofitable while in growth mode. E-commerce trades in a wide range and we can value the stock using Enterprise Value to Sales (EV/S) or Enterprise Value to Gross Profit (EV/GP).

In our mind, the most directly related e-commerce peers include Sea Limited and Mercadolibre. Sea Limited Ads CI A (“SE”), is a Singapore-based company that provides an internet platform consisting of digital entertainment and e-commerce. And Mercadolibre Inc (“MELI”), operates an online marketplace for licensed commercial digital imagery for sale to media and marketing agencies. Other publicly traded peers could include: Amazon (“AMZN”), Alibaba Group (“BABA”), JD.com (“JD”), eBay (“EBAY”), and Pinduoduo (“PDD”).

On an NTM basis, EV/S for SE is approximately 15x and 13x for MELI.  Amazon (“AMZN”) trades at an EV/S of roughly 4x, but that is with a 40% gross margin when you include Amazon Web Services. Additionally, Shopify trades at a 29x times one year forward sales multiple.

CPNG’s forward sales multiple of 3.25x is far below that of its competitors. And analysts and management are projecting >70% growth in 2021 Sales. Analysts predict a 3-year CAGR of roughly 40%. Although CPNG has a market capitalization that is much larger than eBay, it has the potential to keep significantly more of its sales and the ability to add more of its ancillary services. Investors have given a lot of credit to Coupang for its ability to generate significant sales growth in the past several years, much faster than its peers.

EV/Sales (TTM) is 4.25x.

Where CPNG ranks low compared to its peers is in its ability to generate gross profit margins. CPNG had a gross margin of 17% in 2020. Amazon had a margin of 41%, MercadoLibre had a margin of 50%, and Sea had a margin of 31%. And because CPNG has much lower margins, the argument could be made that less weight should be placed on EV/S. Instead, EV/GP may be the more conservative valuation methodology. Compared to its peers, a lower gross profit margin poses a potential red flag. The Korean market is intensely competitive and CPNG needs to keep prices low while improving upon fulfilment and service capabilities as it scales.

This will continue to be a low gross margin business for the near future as it competes to dominate the e-commerce market.  TIW believes that profit margins have the potential to drift to 20% to 30% in the long run.  That being said, for Q1 2021 gross profit increased 70% to $733 million. But gross margin was about 40 basis points lower due to the revenue mix across CPNG’s offerings and additional investments.

We believe that the current lack of profitability is justified given strong growth prospects. On its Q1 2021 earnings call, management said that it will continue to build more fulfilment capacity next year, and has plans to increase its nationwide footprint by over 50% between 2021 and 2022. Remember that this is a $530+ billion-dollar market and based on Coupang’s LTM revenue of $13.8 billion, there is tremendous room to expand.

CPNG is at a Buy Point
At this time, it bears fruit to analyze CPNG’s stock price.

With such a short price history, traditional indicators are less useful here. And TIW is hesitant to focus solely on price action and horizontal support levels. We believe that there may still be a high degree of price discovery taking place, as is the case with many IPOs today. But if pressed for an answer…

The stock has now fallen to less than $32 a share, the lowest it has been since its IPO. We’ve seen a slight rebound in price this week. TIW believes that anything less than $35 dollars creates a buying opportunity for this multi-year buy-and-hold stock. At the current valuation, CPNG is attractively priced.

References

Filings – Registration Statement (S1)
https://sec.report/Document/0001628280-21-004212/

E-Commerce
https://chainstoreage.com/study-e-commerce-market-will-continue-strong-growth-2021

Korea – Statistics
https://kostat.go.kr/portal/eng/pressReleases/3/5/index.board

http://www.oecdbetterlifeindex.org/countries/korea/

Competition
https://pulsenews.co.kr/view.php?year=2021&no=228126

Disclosure

I am/we are long COUPANG (“CPNG”) either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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