Coupang (CPNG 2.10%) and Sea Limited (SE 4.76%) are two of the fastest growing e-commerce companies in Asia. Coupang owns the top e-commerce marketplace in South Korea, while Sea's Shopee is the market leader in Southeast Asia and Taiwan.
Coupang stock trades over 20% below its IPO price as of this writing with a market cap of $47 billion. The stock initially soared after its public debut in March, but concerns about its widening losses, the saturation of its home market, and its overseas expansion plans attracted the bears.
Sea stock, on the other hand, has surged more than 2,000% since its debut in 2017, and the company is now worth $176 billion. The Singapore-based company has dazzled investors with its monetization of Shopee and the growth of its gaming unit Garena, which publishes the hit battle royale game Free Fire.
Sea is more than three times bigger than Coupang by market cap, but it also trades at a much steeper valuation. Sea trades at nearly 20 times this year's expected sales, while Coupang trades at a multiple of just 2.5. Could the tables turn over the next several years with Coupang overtaking its e-commerce rival?
Why investors are paying such a high premium for Sea
Sea's revenue soared 101% to $4.4 billion in 2020 as Shopee and Garena both benefited from stay-at-home trends during the pandemic. Its revenue jumped another 153% year over year in the first half of 2021, and analysts expect full-year revenue to settle at $9.2 billion, up 109%.
It won't be until next year that Sea's growth will likely slow to an estimated 49% as pandemic-related tailwinds wane and Free Fire, which was launched in 2017, loses its momentum in the crowded mobile-gaming market.
However, Sea has already started to launch Shopee in new regions, including Latin America and Europe, to bolster its growth trajectory. And Garena will likely release a sequel to Free Fire, along with other games, to fuel its expansion long after the original Free Fire fades away.
Sea also owns a smaller fintech business that revolves around its Sea Money mobile wallet. That business acquired a digital banking license in Singapore last December, and it could grow into a much larger fintech platform over the next few years.
If Sea matches analysts' estimates for 2021 and 2022, and then continues to grow its revenue 30% annually, it would generate about $30 billion of revenue in 2025. At the current price-to-sales multiple, the company would be worth close to $600 billion -- more than triple its current valuation.
Why investors are less optimistic about Coupang
It may surprise you to learn Coupang is actually the larger company by sales. Its top line also surged in 2020, rising 91% to $12.0 billion as it benefited from the same stay-at-home tailwinds. In the first half of 2021, revenue grew 73% year over year, and the company ended the second quarter with 17 million active customers -- up 26%.
Analysts expect Coupang to report annual revenue growth of 59% and 39% in 2021 and 2022, respectively, with the top line hitting $26.6 billion next year.
Such growth rates are still impressive, but critics believe the company is running out of room to expand in South Korea. Coupang is trying to increase its revenue per shopper by cross-selling more services, including food deliveries through Coupang Eats, fresh grocery deliveries via Rocket Fresh, and streaming videos on Coupang Play. It also bundles Rocket Fresh, Coupang Play, and other perks together in a Prime-like subscription service called Rocket WOW.
However, those efforts are putting significant pressure on its operating margin, contributing to steeper losses. Coupang also plans to expand into Japan, Taiwan, and Southeast Asia to fuel its continued growth, but it will face stiff competition against entrenched market leaders such as Rakuten, Amazon, and Shopee.
Assuming Coupang lives up to Wall Street's near-term estimates and goes on to grow its revenue 30% annually as we forecast for Sea, it would generate over $58 billion of revenue in 2025. Valued at the same 2.5 times sales, the company would still be quite a bit smaller with a market cap $145 billion.
Only greater investor enthusiasm and multiple expansion to about 10 times sales would give Coupang the push it needs to match Sea's hypothetical valuation of $600 billion in 2025.
Does Coupang have a chance?
And here's another consideration that could ultimately help Coupang catch up to Sea: The market is overly pessimistic about the former's growth potential -- even though it's still firing on all cylinders in its home market -- while investors are too bullish on the latter.
Coupang certainly has the lower bar to clear, so any good news -- narrower losses or positive updates regarding its overseas expansion, for example -- could push its valuation higher. Likewise, with its sky-high multiple, Sea could see a rapid sell-off if Shopee's losses widen, gaming growth stalls out, or it fumbles its debt-fueled expansion into Latin America and Europe.
In the end, I'm not sure either company will be worth $600 billion by 2025, but the market does seem to be undervaluing Coupang while overvaluing Sea. And regardless of which company comes out ahead as the bigger e-commerce stock, I believe both companies are promising long-term investments.