One of my favorite traits to find when looking at new potential growth stocks is growth optionality, or the ability of a company to create new sources of revenue. This is especially the case when a company has a strong cash-generating core business that allows for funding new, albeit adjacent, sales ideas.
Fitting this mold to perfection, Seoul-based Coupang (CPNG -0.17%) and its market-leading e-commerce operations have quietly begun funding the company's growth-optionality prospects. Hidden under the vague title of "other revenue," Coupang's division of small bets and add-on services is not only rapidly expanding but also quickly becoming key to the company's long-term growth story.
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Other revenue's rapid growth
After seeing its quarterly sales rise 113% year over year for the third quarter, other revenue now accounts for 11% of Coupang's total sales. Coming from several sources, the segment's sales include:
- Third-party sales fees and commissions.
- Rocket WOW membership service (free delivery, free returns, access to Rocket Fresh, etc.).
- Rocket Fresh grocery delivery.
- Coupang Eats food delivery.
- Advertising on websites and apps.
Starting with third-party sales, Coupang is beginning to expand its offerings to its merchants, recently launching a beta version of its logistics fulfillment service. Having already built out a strong network across South Korea through its first-party operations, the company is well-positioned to integrate its merchants' sales into its logistical ecosystem.
Meanwhile, Rocket WOW is the company's membership service. It costs roughly $2.50 a month and provides similar benefits to Amazon Prime. An impressive 32% of Coupang's 16.8 million active customers have a Rocket WOW membership, which provides over $160 million in high-margin cash flow to the company.
As for Rocket Fresh, the company is still in the early innings of building out the necessary infrastructure to make same-day grocery delivery a profitable long-term endeavor. For example, by the end of 2021, Coupang is on track to double its total fulfillment center infrastructure, highlighting its focus on long-term cash generation over short-term profits.
Regarding Coupang Eats, management announced that its relatively new app has already become the most-downloaded iOS app and second most downloaded Android app in South Korea. This is remarkable since the new unit was launched by Coupang only two years ago, showing an incredible rate of adoption.
Finally, the company announced that its advertising unit grew by nearly 200% year over year for the third quarter. While advertising is not yet broken out individually by management, founder and CEO Bom Kim has high expectations for the unit, stating, "Our monetization efforts are also gaining traction ... We're still in the early innings and expect advertising to contribute significantly to margins in the future."
Should Coupang manage to take another page out of Amazon's playbook and successfully develop its own high-margin advertising business, it could prove to be a key driver of profitability further down the road.
Why this is a game-changer for Coupang's stock
Simply put, every single one of Coupang's other revenue sources is a bet on long-term cash generation at the cost of missing out on profitability today. Furthermore, each of these ideas is still in its relative infancy, promising to deliver strong profitability as they reach stronger economies of scale -- which is absolutely possible considering South Korea's high population density.
Consider that Amazon's massive cash generation is accomplished in a country with one-fifteenth the population density as South Korea. As Rocket WOW, Rocket Fresh, and Coupang Eats continue to mature and build out the necessary logistical networks for their success, the country's uniquely high density could provide strong margins.
Additionally, based on price-to-gross profit, Coupang's 41% quarterly revenue growth rate comes at an attractive price compared to two of its peers: MercadoLibre and Sea Limited.
| Company | Market Capitalization | Gross Profit (TTM) | Price-to-Gross Profit |
|---|---|---|---|
| Coupang | $47 billion | $2 billion | 24x |
| MercadoLibre | $61 billion | $2 billion | 31x |
| Sea Limited | $131 billion | $1.4 billion | 97x |
Source: Yahoo! Finance. TTM = trailing twelve months.
However, what makes this even more interesting to investors is that Coupang grew its gross profit by 62% year over year in Q3, which means that the company is poised to outgrow this relatively cheap valuation soon.
All in all, Coupang's long-term focus and South Korea's high population density are set to provide economies of scale for the company and its other revenue segment in due time, making it a brilliant holding for decades to come.
