Is Coupang Stock a Buy?

Coupang's (CPNG 0.34%) stock sank 9% on Nov. 12 after the South Korean e-commerce leader posted its third-quarter results.

Its revenue increased 48% year over year to $4.6 billion  but missed estimates by $200 million. Its net loss widened from $173 million to $324 million, or $0.19 per share, which also missed expectations by a penny.

On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Coupang's net loss still widened from $177 million to $207 million. Those headline numbers look ugly, but could Coupang's stock be worth buying as it languishes far below its IPO price of $35?

Don't call it the "Amazon of South Korea"

Coupang is frequently called the "Amazon of South Korea" because it's the country's e-commerce leader. It also generates most of its sales from its first-party marketplace, its expanding its ecosystem with new features like grocery delivery services and streaming videos, and it offers a Prime-like subscription service called Rocket WOW.

Image source: Getty Images.

But Coupang is also different from Amazon in two major ways. First, Amazon accounted for 40% of the U.S. e-commerce market this year, according to eMarketer, while the rest of its rivals hold single-digit shares. Coupang's lead is a lot narrower: it controlled 25% of South Korea's e-commerce market in 2020, according to Goodwater Capital, while its closest rival, eBay's Gmarket, still held a 20% share.

Second, Amazon is consistently profitable because its cloud platform, Amazon Web Services (AWS), operates at much higher margins than its retail business. Coupang doesn't own a comparable profit engine, yet it continues to sacrifice its margins for growth by investing in lower-margin and loss-leading services.

Decelerating growth in a post-pandemic market

Coupang's revenue skyrocketed 93% in 2020, as its number of active customers increased 26% to 14.85 million throughout the pandemic. The expansion of its logistics network, which placed fulfillment centers within seven miles of roughly 70% of the South Korean population, also paid off and enabled Coupang to fulfill most of its deliveries within a single day.

But over the past year, its year-over-year revenue growth decelerated as more businesses reopened. Its total number of active customers also dipped sequentially in the third quarter, but it partly offset that slowdown by increasing its net revenues per active customer:

Source: Coupang. YOY = Year-over-year.

Coupang's top-line growth still looks impressive, but investors seem conflicted about its margins and losses:

Source: Coupang. *Impacted by a fulfillment center fire.

Coupang's gross margin expanded sequentially in the third quarter, but mainly because it faced an easy comparison to a warehouse fire in the second quarter. Excluding the impact of that fire, Coupang would have posted a gross margin of 18.2% in the second quarter -- so its gross margins are still gradually shrinking as its adjusted EBITDA and net losses widen.

During the conference call, Coupang CFO Gaurav Anand attributed that pressure to higher COVID-19 costs, labor expenses, and investments, but said that as the company would move "past these short-term headwinds" and "unlock meaningful margin expansion" as its scale improves.

But Coupang's declining gross margins are still troubling, because they suggest it doesn't have enough pricing power or scale in the South Korean market yet. It plans to boost its gross margins by aggressively expanding its third-party marketplace and advertising businesses, but those strategies could backfire and cause lower-quality goods to seep into its marketplace.

As for its overseas expansion, which the company has repeatedly highlighted as a major catalyst for its long-term growth, CEO Bom Kim said those efforts remained in a "nascent stage" during the conference call.

Coupang still held $3.93 billion in cash and equivalents at the end of the third quarter -- so it can afford to remain unprofitable as it ramps up its investments and overseas experiments -- but it eventually will need to stop the bleeding.

Coupang's valuations will remain depressed

Analysts expect Coupang's revenue to rise 54% this year and 39% next year. Based on those expectations, Coupang's stock looks very cheap at 1.8 times next year's sales. Amazon, which is growing at a much slower rate, trades at 3.2 times next year's sales.

However, Coupang's valuations will likely remain depressed until its revenue growth, gross margins, and net losses stabilize. It also needs to stop losing active customers on a sequential basis.

Coupang's stock is worth accumulating at these levels, since the stock is undeniably cheap and has a lot of growth potential, but investors should fully understand the risks and realize it could be a very bumpy ride.