E-commerce has seen tremendous growth across the globe due to the COVID-19 pandemic with global penetration now above 20%, and total e-commerce sales above $4.2 trillion. Within the global e-commerce industry, South Korea is one of the most developed economies as online retail spending is projected to exceed $200 billion a year by 2024. One company that is leading this charge in South Korea is Coupang (NYSE:CPNG), which just went public in early March.
Here's why Coupang might be the Asian e-commerce stock to bet on over the next decade and beyond.
An end-to-end solution
Coupang runs a standard e-commerce business and operates a similar model to what Amazon offers in America. The core of the company is the logistics and delivery network it has built out for itself. Think of it as if Amazon decided to start competing with UPS from the start. Coupang had to spend billions of dollars to build its own fulfillment network, because no scaled solution actually existed in South Korea at the time of its founding in 2010.
Building out a logistics network has significant upfront spending, but in the long run, it will help Coupang differentiate itself, because it can now offer an end-to-end e-commerce solution with lower prices and faster delivery than its competitors. It's also the engine that powers Coupang's Rocket Wow membership (similar to Amazon Prime), Dawn Delivery (most items ordered before midnight arrive before 7 a.m. the following day), and frictionless returns. To return items on Coupang, all customers have to do is press a button on the Coupang app and leave the item on their front doorstep -- the company's network of delivery drivers takes care of the rest.
Outside of its core e-commerce offering, Coupang has ventured into some adjacent business lines. One of these is a software service for merchants called MyStore, which allows merchants to easily set up digital storefronts to sell online, like Shopify but with fully-scaled logistics infrastructure attached to it.
Another large bet that Coupang is making is within the food and grocery delivery space with a service it calls Coupang Eats. A lot of investors, myself included, doubt the long-term viability of American food-delivery platforms like DoorDash and Uber Eats. However, Coupang is set up to succeed with food delivery. For one, it has 15,000 fully-employed delivery drivers within its current logistics network that it can utilize for the service. And two, the geography of South Korea (it has only 1% of the landmass of the U.S. with over 80% of the population living in cities) makes running a food or grocery delivery business a lot more feasible.
Overall, Coupang's logistics network allows it to tackle other opportunities like food delivery and is the key competitive advantage that should allow Coupang to grow long term.
The valuation is steep
At its current market cap of $72 billion, Coupang has a price-to-sales (P/S) ratio just above six. However, since Coupang's business model has high variable costs, its gross margin is less than 17%. So while the P/S multiple doesn't look crazy, Coupang trades at a premium valuation relative to the gross profit it generates, indicating a lot of future growth is expected by the current shareholder base. The business did generate $301 million in operating cash flow last year, which shows Coupang's model can generate cash at scale (even if the margins are low).
Overall, while the valuation is high, there is a ton to like about Coupang stock going forward. It is the market leader in a hundred-billion-dollar industry with minimal competition and a true competitive advantage in its logistics network. If you want to invest in the e-commerce industry, there's no reason a high-growth operation like Coupang shouldn't be at the top of your watchlist.