The growth of e-commerce around the globe has provided monster winners for investors over the past few decades. We all know the stellar returns of Amazon shares, but other companies like MercadoLibre and Sea Limited have crushed the S&P 500 as well. This trend should have investors looking for other e-commerce stocks around the globe with business models similar to these long-term winners.
Luckily, one such company just went public this spring. Called Coupang (CPNG 1.88%), the company is dominating the e-commerce market in South Korea and is using its platform to kickstart other successful business lines.
Here's why Coupang stock belongs on every investor's watch list.
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Coupang dominates in its home country
Coupang was founded in 2010 with a similar idea to Groupon, but then it pivoted its business model to become a first- and third-party e-commerce marketplace, similar to Amazon. What's most impressive about Coupang is that it is almost entirely vertically integrated. This means that Coupang has built and operates its own shipping business, which gives it a distinct advantage over any e-commerce competition in South Korea. With this end-to-end logistics network and how densely populated South Korea is, Coupang is able to deliver items within hours nationwide. Plus, with its 15,000-plus employee delivery drivers, Coupang is able to utilize frictionless returns (customers just leave an item outside their door) and has eliminated packing for 75% of items, saving resources and energy.
With this superior value proposition, Coupang has grown like gangbusters over the past few years. In the second quarter of 2021, Coupang grew revenue 57% year over year (on a constant currency basis) to $4.5 billion. This marked the 15th consecutive quarter of 50%-plus revenue growth, showing the huge opportunity Coupang continues to capture. Active customers hit 17 million in the period, up 26% year over year, and annual revenue per active customer grew 36% to $263. With South Korea's population of slightly over 50 million, Coupang already has captured a lot of the e-commerce customers in the country (it is likely a lot of these active accounts have more than one user), so it is important for the company to grow the spending from existing customers.
To do this, Coupang is utilizing its delivery network to offer food and grocery delivery under the Coupang Eats and Rocket Fresh brands. Fresh revenue grew 100% year over year in the period and Eats revenue has tripled over the last two quarters. Given the advantage of a vertically integrated delivery system, Coupang is easily able to expand to new product offerings outside its core e-commerce marketplace.
Expansion coming soon for Coupang
Coupang is doing extremely well in its home market, but investors might worry that the opportunity in South Korea is limited. The company has been secretive about what its plans are, but it has made soft launches in Taiwan and Japan, to markets fairly close to its home country, and has job offerings in Singapore.
It would take years and billions of dollars to build up the same level of logistics infrastructure in these countries as in South Korea, so don't expect these markets to catch fire for Coupang anytime soon. However, with over $4 billion in cash on its balance sheet, Coupang has a large war chest to invest in these countries. Its efforts aren't guaranteed to pan out, but if the company can replicate the same value proposition it has in South Korea, there's no reason the company cannot succeed in other Asian markets.
Coupang's valuation is reasonable
With the stock price falling around 43% since going public this spring, Coupang now has a market cap of $49 billion. With around $19 billion in revenue expected this year, that gives the stock a price-to-sales ratio (P/S) of 2.6. If you invest in software and/or consumer internet stocks, you might think this looks extremely cheap. However, Coupang has very low gross margins (the downside of its vertically integrated model). In Q2, gross margin was 14.7%, although it is usually slightly higher and was down due to a warehouse fire.
Taking this into consideration, a low P/S does not make Coupang a cheap stock, and investors should be tracking gross profit as a metric of Coupang's business success in the intermediate future. Still, given the company's track record of growth, a market cap of $49 billion isn't insane, especially if you think Coupang's model can work in other countries.
Coupang's business is firing on all cylinders, and the stock trades at a reasonable valuation right now. Combine those two factors, and I believe Coupang is a stock that belongs on every investor's watch list.
