Coupang (CPNG +0.28%), the top e-commerce company in South Korea, posted its second-quarter numbers on Aug. 11. Its revenue growth exceeded Wall Street's expectations, but a wider-than-expected loss caused its stock to plunge below its IPO price of $35 a share. Does that sell-off represent a buying opportunity for long-term investors?
Coupang's core business is still growing
Coupang's revenue rose 71% year over year (57% on a constant currency basis) to $4.48 billion, beating estimates by $50 million and marking its 15th consecutive quarter of more than 50% year-over-year constant currency sales growth.
Image source: Getty Images.
Coupang's number of active customers grew 26% to 17 million, while its revenue per active customer increased 36%. Here's how those numbers stack up to its growth over the previous two quarters:
|
Year-over-year Growth |
Q4 2020 |
Q1 2021 |
Q2 2021 |
|---|---|---|---|
|
Revenue (Constant Currency) |
93% |
63% |
57% |
|
Active Customers |
26% |
21% |
26% |
|
Revenue per Active Customer |
59% |
44% |
36% |
Source: Coupang.
Like many other e-commerce companies, Coupang's growth is decelerating as it faces tougher year-over-year comparisons to the pandemic.
However, Coupang continues to expand its newer services, including Rocket Fresh for grocery deliveries and Coupang Eats for restaurant deliveries, to boost its revenue per active customer. During the conference call, CEO Bom Kim noted: "Fresh grocery and food delivery are significant opportunities with large addressable markets and low online penetration."
Coupang also continues to expand its Rocket WOW service, which bundles together access to Rocket Fresh, its streaming video service Coupang Play, faster shipping options, free unlimited returns for 30 days, and other perks for a monthly fee. Coupang hasn't disclosed WOW's number of paid subscribers yet, but Kim attributed its robust second-quarter growth to its "unrelenting focus" on the platform.
Its net loss isn't as ugly as it initially seems
Coupang's sales growth looks healthy, but its second-quarter net loss more than tripled year over year from $159.9 million to $518.6 million. Its net loss of $0.30 per share missed estimates by $0.16.
That ugly loss can be attributed to two main challenges. First, a warehouse fire caused $158 million in inventory write-offs and $295.5 million in net losses. Excluding the fire, Coupang would have posted a net loss of $223.1 million, or $0.13 per share, and beaten Wall Street's expectations by a penny.
On a reported basis, Coupang's gross profit rose 50% year over year, but its gross margin declined from 16.8% to 14.7%. But excluding the fire's impact, Coupang's gross profit would have increased 86% year over year, while its gross margin would have expanded to 18.2%.
Second, Coupang continued to ramp up its investments in Rocket Fresh and Coupang Eats, which contributed significantly to an 84% jump in operating expenses during the quarter.
On the bright side, Coupang noted that Fresh and Eats accounted for nearly its entire adjusted EBITDA loss of $122.1 million, which widened from a loss of $57 million a year earlier. In other words, its first- and third-party marketplaces are now nearly profitable on an adjusted EBITDA basis.
What are Coupang's plans for the future?
Coupang didn't provide any forward guidance, but analysts expect its revenue to rise 62% for the full year and for its bottom line to remain in the red. Coupang trades at just three times this year's sales, which is comparable to Amazon's (AMZN +0.26%) price-to-sales ratio.
Coupang is growing a lot faster than Amazon, but Amazon is consistently profitable because its Amazon Web Services (AWS) cloud platform generates higher-margin revenue than its retail business.
Coupang doesn't own a comparable profit engine that can offset its retail losses yet, and it's mainly trying to stabilize its bottom line by reducing its losses per order and expanding its less capital-intensive third-party marketplace, which could cause lower-quality products to creep onto its platform.
Meanwhile, it's aggressively expanding unprofitable services like Fresh and Eats, and its long-term plans to expand overseas in Japan, Taiwan, and Singapore could be costly and run into heavy resistance from entrenched regional leaders like Amazon, Rakuten (RKUNY +2.10%), and Sea Limited's (SE +1.01%) Shopee.
Is Coupang's stock worth buying?
I recently bought a small position in Coupang, since I believe it still has room to grow in its home market and its stock looks cheap relative to its growth. Its post-earnings plunge might represent a good opportunity to accumulate more shares, since the market seemingly overreacted to its massive net loss without reading the fine print regarding its warehouse fire.
That being said, I own much larger stakes in Amazon and Sea, since it's easier to see their longer-term growth trajectories. Amazon will keep leaning on AWS to expand its e-commerce business, while Sea will continue to subsidize Shopee's growth with its more profitable gaming unit.
Investors who think Coupang's aggressive expansion plans will pay off should consider buying some shares as it dips below its IPO price. However, they should brace for a lot of near-term volatility as the bears question its ability to continue expanding domestically and overseas.
