Coupang (NYSE:CPNG) is one of the largest IPOs of the last few years, raising $4.6 billion in its market debut this spring. The South Korean e-commerce giant is growing rapidly within its home country, but due to the relatively small size of South Korea versus other economies around the world, many investors are worried its financials have a low ceiling.
However, the company might be on the road to unlocking new growth opportunities, with plans to move into Singapore, Japan, and possibly Malaysia sometime soon. Here's what we know about Coupang's expansion plans and what it could mean for the stock going forward.
In April, the Korean Economic Daily reported that Coupang was hiring team members to launch into Singapore sometime shortly. More recently, rumors have come out that the company wants to move into Japan and Malaysia as well. These three countries look like good fits for Coupang to replicate its business model. Singapore is a small but densely populated area, similar to Seoul, South Korea. It is a lot smaller than Coupang's home country, with a population of only 5.7 million people versus South Korea's 51.7 million.
Japan has a much larger population than South Korea, with 126 million citizens, and Tokyo is the largest urban area in the world with a total population of around 38 million people. This could be a huge opportunity for Coupang if it can make inroads within the Japanese market. Malaysia isn't as rich of a country as Singapore or Japan, but it has a fast-growing urban center in Kuala Lumpur with a population of 8.2 million.
I mention these population numbers because Coupang's value proposition relies on it operating in large, densely populated urban centers like Seoul. The company has built an end-to-end logistics network with its own warehouses, delivery drivers, and technology systems that allows it to offer one and same-day delivery to most of its members on its e-commerce marketplace. This owned network within these urban centers also allows Coupang to add services on top of its core e-commerce offering, like food and grocery delivery. Expect it to try to replicate this model if/when it launches in these new markets.
It will face stiff competition
Coupang has come to dominate South Korean e-commerce, and a big reason for that is the minimal competition it has from large, well-capitalized players. That will change once it moves outside of its home country.
In Singapore and Malaysia, the platform will face competition from Shopee, which is owned by Sea Limited (NYSE:SE), and Lazada, which is owned by Alibaba (NYSE:BABA). These two companies have large market caps and a lot of money to invest. Coupang's main competitor in Japan will be Amazon (NASDAQ:AMZN), the well-known e-commerce giant. Amazon only has a 25% market share in the country, so there's a lot of opportunity for other platforms like Coupang to emerge and grow.
One thing investors should note is that Amazon runs a similar playbook to Coupang, which is to invest a ton in delivery infrastructure to help offer as much efficiency, low prices, and convenience to its customers as it can. It might be tough for Coupang to compete against the incumbent by running a similar strategy, especially one with as much money as Amazon. This doesn't mean Coupang can't succeed in Japan, just that it likely will be a more difficult operating environment than South Korea.
What does it mean for the stock?
For Coupang stock to perform well over the coming years, it will likely need to succeed with these international expansion plans. This business is growing rapidly within its home market, but at a market cap of $68 billion, the valuation is still expensive relative to its trailing financials. In Q1, revenue grew 74% year over year to $4.2 billion, with trailing-12-month revenue coming in at $18.5 billion.
While these revenue numbers are looking strong, Coupang has low gross margins, at 17.4% last quarter, which puts a low ceiling on its profit margin potential. It will also need to make billions in capital investments over the next few years to build out its end-to-end logistics network in these new markets. At the end of Q1, Coupang had $4 billion in cash, so it has plenty of dry powder to make these investments, but they will be a drag on cash generation for at least the next few years, if not longer.
Coupang has a strong strategy and is looking to replicate some of Amazon's success by using a similar model in different Asian countries. If the company is successful with these planned expansions into Japan, Singapore, and Malaysia, Coupang could be on its way to $100 billion in annual revenue, and the stock could do just fine over the next decade. But if not, investors could end up in trouble due to the stock's high current valuation.