South Korean e-commerce business Coupang (CPNG -0.11%) has seen spectacular growth, but despite its dominance, the stock is near its all-time lows. The company has expansion opportunities ahead, but it will have to jump over some steep hurdles to get achieve its international goals.
Its low valuation and potential growth areas make Coupang an investment that carries plenty of risks, but if it is successful, it could reward shareholders handsomely over the next five years.
Its dominance in South Korea
Since its founding in 2010, Coupang has become the largest product e-commerce company in South Korea. Because 70% of its customers are within just seven miles of one of the company's logistic centers and it has a delivery fleet of over 15,000 full-time drivers, Coupang has been able to standardize same-day delivery or next-day delivery. One-hundred percent of orders are delivered within the next day or sooner. It even has Dawn Delivery, where orders placed before midnight are delivered by seven in the morning the next day, which blows Amazon's two-day Prime delivery out of the water.
The speed of delivery and subsequent customer satisfaction has allowed the company to increase its revenues by 50% for 12 consecutive quarters to $4.5 billion, which grew 71% year over year in the second quarter of 2021. The company increased its customer base to over 17,000 in the second quarter (representing 36% growth) while increasing net revenue per customer from $194 to $263 year over year.
The company is still gaining prominence in South Korea, even though it is already a leading e-commerce player. This leadership position could allow it to grow alongside the country's e-commerce market as a whole, which is expected to grow 10% annually from $128 billion in 2019 to $206 billion by 2024. Achieving $15.7 billion in trailing 12-month sales, Coupang currently holds just 10% of Korea's 2021 e-commerce market share. The e-commerce market is very fragmented; Coupang and eBay (EBAY -0.55%) each control 10% of the market. The difference between Coupang and eBay, however, is that Coupang is growing much faster than eBay, which grew its revenue by just 2% year over year in its recent quarter.
The company is not profitable, and the margin profile for the business isn't pretty. Gross margin in the second quarter of 2021 was just 15%, and the company spent 178% -- over $1.1 billion -- of gross profit on operating expenses. Coupang reported a net loss of $813.6 million over the first six months of 2021, but nearly $300 million of that came from expenses due to a warehouse fire. Excluding that, the company still had a net loss of $530 million, and its free cash flow was negative $183 million -- even after taking out fire-related expenses.
Why the drop?
On the day it started trading in March, shares jumped 81% to $63.50, but since then shares have fallen steadily to the high $20 range. What may be bringing shares down is the fact that the company reported 74% and 71% revenue growth for the first quarter and second quarter of the year. While 70% growth is great for any company, it is slower than the 90% growth it saw in each quarter of 2020.
Because of its price decline and strong revenue growth, the company's valuation has gotten very appealing: At the beginning of April, the company was trading at 6.8 times 2020 sales, and now it is trading at just 2.6 times trailing 12-month sales.
This valuation is especially attractive for a company that is a market leader in Asia. Compared to Sea Limited -- which trades at 25 times trailing 12-month sales -- Coupang offers a much lower price for a market leader in a quickly growing geography.
Where does Coupang go from here?
Coupang's low valuation also might be due to skepticism about how much growth is ahead. While there is good market growth in South Korea, that alone will not allow Coupang to maintain 70% growth. Rather, investors want it to expand internationally.
Coupang has alluded to plans to expand into Singapore and Japan. Ihe company will face stiff competition in both regions, namely from Sea Limited in Singapore and Amazon in Japan. Sea Limited has a strong grip on Singapore and the rest of Southeast Asia, so much so that it has been able to expand and see strong success across the ocean in Brazil -- all while maintaining dominance on its home turf. Amazon and Rakuten controlled a combined 38% of e-commerce sales in 2020 in Japan, so fighting for prominence there will be a difficult task as well.
While Coupang's customer service and speed are unmatched, the company will have to face tough competitors if it wants to continue its strong growth. Investors should watch its performance in Singapore and Japan, and if it can gain market share there, then the company could see strong, sustained growth for many years. Right now, international success is still up in the air, and until Coupang can prove itself outside of South Korea, investors might want to watch and wait before buying up shares.