Coupang (CPNG -0.02%) has been a frustrating stock to own since its IPO. The South Korean e-commerce stock went public at $35 this March, started trading at $63.50, and hit its all-time high of $69 that same day.
But today, Coupang's stock trades nearly 20% below its IPO price. Concerns about its decelerating post-pandemic growth, lack of profits, and its saturation of the South Korean market caused the stock to lose its luster.
SoftBank (SFTB.Y 0.75%), which owned 37% of Coupang at the time of its public debut, also exacerbated that pressure by selling $1.69 billion in shares at a 15% discount to its IPO price last month. Does that sell off indicate it's time for investors to abandon Coupang's sluggish stock? Let's examine three reasons to buy the stock -- as well as one reason to sell it -- to decide.
Image source: Getty Images.
1. It still has room to grow in South Korea
Coupang's share of South Korea's e-commerce market rose from 18.1% in 2019 to 24.6% in 2020, according to Goodwater Capital.
Its closest competitor, eBay's (EBAY -0.32%) Gmarket, grew its share from 19.1% to 19.7%. The country's smaller platforms -- SK Telecom's (SKM -0.24%) 11Street, eBay's Auction, and WeMakePrice -- all suffered market share declines throughout 2020. The only underdog that expanded was Naver Shopping, which grew its share from 8.1% to 8.3%.
Coupang pulled ahead of Gmarket by aggressively expanding its logistics network. Today, roughly 70% of South Korea's population lives within seven miles of one of Coupang's logistics centers -- which makes it easy for its Rocket Delivery service to fulfill most orders within a single day.
Coupang served 17 million active customers at the end of the second quarter, up 26% from a year earlier. That's nearly a third of South Korea's total population of 52 million, but Coupang could still pull more shoppers away from its smaller competitors and brick-and-mortar retailers.
2. Its ecosystem is expanding
Coupang plans to lock in its customers, boost its revenue per customer, and widen its moat by expanding its ecosystem.
Coupang already offers fresh grocery deliveries with its Rocket Fresh service, restaurant deliveries through Coupang Eats, and a new streaming video platform called Coupang Play. It bundles Rocket Fresh, Coupang Play, expedited delivery, and other perks into a subscription service called Rocket WOW.
Coupang hasn't disclosed its exact subscriber numbers for WOW yet. But back in May, CEO Bom Kim said its WOW members purchased products at a "significantly higher frequency and across more categories than non-WOW members." Kim also said that Coupang was continuously testing out "dozens of services of new experiments" to expand that ecosystem.
3. Coupang's growth rates and valuations
Coupang continues to grow like a weed. Its revenue rose 93% in 2020 as it benefited from the same stay-at-home tailwinds throughout the pandemic, and grew another 73% year-over-year in the first half of 2021.
Analysts expect Coupang's revenue to increase 57% this year and 40% next year. Based on those forecasts, its stock trades at less than two times next year's sales, which seems irrationally cheap relative to its growth.
Coupang is unprofitable, and it should stay in the red as it continues to expand its ecosystem. Its net loss widened significantly -- from $300.1 million in the first half of 2020 to $813.6 million in the first half of 2021 -- but investors should note that those losses were amplified by a warehouse fire that caused $295.5 million in net losses in the second quarter.
Coupang's red ink raises red flags, but plenty of other high-growth e-commerce companies still operate at losses or paper-thin margins.
The one reason to sell Coupang: its overseas expansion plans
Coupang is still generating plenty of growth in South Korea, where its average revenue per customer rose 36% year-over-year in the second quarter.
But it also realizes it's saturating its home market and needs to gain more overseas users. That's why it recently took baby steps into Japan, Taiwan, and Southeast Asia. However, I'm not too confident in these plans because each of those regions is dominated by entrenched leaders.
Amazon and Rakuten dominate the Japanese e-commerce market, while Sea's Shopee is the clear leader in Taiwan and Southeast Asia. If Coupang plans to challenge those leaders by building new logistics centers, as it did in South Korea, those efforts could be very expensive -- but bear very little fruit.
Do Coupang's strengths outweigh its weaknesses?
I believe Coupang will continue to widen its lead against its rivals in South Korea as its ecosystem expands. But those efforts will be costly, and I'm not convinced its expansion plans beyond South Korea will work.
That said, I believe Coupang's stock is still too cheap to ignore at these levels. The stock might not generate massive gains like Amazon or Sea, but I think it could easily double or triple if it continues to grow in South Korea. If it defies my expectations and successfully gains ground in other Asian markets, its stock could generate even bigger multibagger gains over the long term.
