The e-commerce industry was already growing at a rapid pace before COVID-19 rocked the world. The tailwind provided by the pandemic just accelerated the growth of many businesses dedicated to online shopping and digital commerce. One company that has benefited from industry growth is South Korea-based Coupang (NYSE:CPNG), which has a business model similar to Amazon and JD.com. The company just IPO'd this spring, and has grown its market share in South Korea each of the last five years with its vertically integrated delivery model.
With the stock down 30% from its highs, is now the time to buy Coupang stock? Let's take a look.
Q2 earnings looked solid
Coupang reported earnings for the second quarter on Aug. 11. Revenue was up 71% in the period to $4.48 billion, marking the 15th consecutive quarter of 50% year-over-year revenue growth, showing how well Coupang's model resonates with the South Korean population. Active customers grew 26% year over year to 17 million, and revenue per active customer grew 36% to $263. With a population of just over 50 million in South Korea, Coupang is probably getting close to market saturation in the country (a lot of accounts likely have more than one user). So it is vital for the company to continue growing sales per customer at a strong clip.
Coupang had an operating loss of $500 million in the period and has spent $315 million on capital expenditures just through the first half of 2021. A lot of this loss can be attributed to its investments in food and grocery delivery, which management said are still losing money for Coupang. But with over $4 billion on its balance sheet post-IPO, Coupang has a long runway to invest for growth. With that cash, it can build out its technology, fulfillment, and all sorts of delivery services to better serve its customers.
Food and grocery delivery represents a huge opportunity
A big growth category for Coupang is food and grocery delivery, under its Coupang Eats and Rocket Fresh brands. In the second quarter, Fresh revenue grew 100% year over year, hitting a $2 billion annual revenue run rate (the amount of revenue the segment would have if the quarter was annualized to a full year). Coupang Eats is growing even more quickly, tripling revenue over the past two quarters.
Both of these segments are unprofitable at the moment, and will likely have low margins even at scale. However, what gives Coupang an advantage is that it uses its existing delivery and warehouse teams to power these segments. Coupang treats its employees well, giving drivers a five-day workweek and a minimum of 15 days off a year, which is better than the industry norm of just contracting out the work. It also made 39,000 frontline workers shareholders by giving them restricted stock units (similar to stock options) at the IPO. These initiatives, while costly, should build a strong company culture over the long term.
There have been rumors that Coupang is going to move into other Asian markets, with job postings in places like Singapore, Taiwan, and Japan. When asked about it on the conference call, CEO Bom Kim declined to give any details but said it was something the company is planning on doing. With such a large opportunity to go after in South Korea, estimated by Coupang to be $500 billion a year by 2024, there is no need for Coupang to expand internationally yet. But with only 50 million people in South Korea, there is definitely a ceiling to how much spend can come from the nation alone.
Coupang's model of quick delivery (it can do most orders overnight) works well in densely populated areas like Seoul. Singapore, Taiwan, and Japan look like perfect areas to replicate this model. Again, it is likely still a few years out from becoming a reality.
The valuation is still expensive
With a market cap of $52.9 billion and trailing-12-month revenue of $15.6 billion, Coupang has a price-to-sales ratio (P/S) of 2.9. This might look cheap, but with a gross profit of only $2.66 billion over that period, Coupang's not bringing in high-profit margins off of that revenue. Gross profit, and eventually net earnings and cash flow, should grow at a rapid rate over the next few years if Coupang can keep up this historical growth. But with such low margins, the stock still looks expensive, even when down over 20% from the IPO.
If you're confident Coupang can grow at a high rate over the next five to 10 years, then it may be smart to buy shares now. But don't get fooled by a low P/S relative to other fast-growing technology companies , Coupang stock could still be considered "expensive" at the moment.