E-commerce got a huge boost from the COVID-19 pandemic and its associated lockdowns. Companies like Amazon (NASDAQ:AMZN) and Etsy (NASDAQ:ETSY) saw sales growth accelerate due to the increased penetration of online shopping. Coupang (NYSE:CPNG), a South Korean e-commerce company, also saw big gains. The recent IPO is growing its sales at a rapid pace as it tries to gain market share in its home country.
However, along with a lot of recent IPOs, Coupang's stock is down over 25% from its first trading day, even after the company released stellar first-quarter earnings. With shares trading at a discount is now the time to buy Coupang stock? Let's take a look.
Coupang released its first-quarter earnings on May 12. Total net revenue was up 74% year over year to $4.2 billion in the period, while active customers grew 21% to 16 million. Add to that net revenue per active customer growing 44% from 2020 and you can see the increasing value Korean consumers are putting on the everyday low prices, wide selection, and uber-fast delivery (most items arrive by 7 a.m. the next morning) of Coupang's e-commerce platform.
But while the top-line numbers looked great, Coupang had a net loss of $295 million in the period, which is a sizable burn rate. Some of this was due to one-time IPO expenses (it went public in March), but it also shows that Coupang is sacrificing short-term profits by plowing any cash generated back into building out its end-to-end logistics and technology infrastructure. There is a risk that Coupang will never achieve profitability by taking this Amazon-like approach, and investors should track how much cash the company burns over the next few years. It also has a low gross margin of only 17.4%. The more scale Coupang achieves, the more operating leverage and gross margin expansion should come with it.
Outside of its core e-commerce offering, Coupang's "other revenue" segment, which includes its food delivery and advertising businesses, grew 126% to $400 million in Q1. Coupang is making tons of investments outside of basic e-commerce, including within payments with Coupang Pay and in streaming video with Coupang Play. These aren't meaningful to the business right now, but investors should track the growth of "other revenue" to evaluate whether they are panning out.
There's still growth ahead
With over $4 billion in cash on its balance sheet and minimal debt, Coupang has a lot of breathing room to invest in growth. In Q1 alone the company spent almost $150 million on capital expenditures. It already has 25 million square feet of fulfillment space, which gives it a distinct advantage over any e-commerce company trying to compete on price. Referencing its scale and infrastructure advantage, on the quarterly conference call CEO Bom Kim said that after the IPO, "We have capital that we are going to use to extend that advantage."
Coupang only has 16 million customers compared to a total South Korean population of 52 million, so it still has a lot of room to grow within its home market. However, it will eventually need to expand internationally. Management was asked about this on the conference call and said that right now Coupang is focused on expanding its capabilities within its home market, but that perfecting these e-commerce processes will give the company a better chance of success when it moves to new markets. Saying "when" vs. "if" in reference to expansion is a subtle but key difference in how management responded here, indicating that the company is currently committed to moving outside of South Korea. It is unknown what regions Coupang would move into, but it would likely be somewhere in Asia.
But what about the valuation?
Coupang currently has a market cap of around $63 billion, giving it a trailing price-to-sales ratio (P/S) of 4.6. With no relevant profitability metrics since the company does not generate a consistent income, a P/S below five may seem reasonable if you typically invest in the software industry. But remember that Coupang has a low gross margin, meaning that once it matures every dollar in sales will likely only mean a small number of earnings or free cash flow. This doesn't mean it is a bad investment, just that it still trades at a premium valuation relative to its future earnings potential. With that being said, if you believe in Coupang's ability to grow its top line and the moat it has formed with its large logistics investments, it might be smart to pay up for the stock here if you have a five-year time horizon or longer.