What happened
Shares of South Korean e-commerce giant Coupang (CPNG 1.01%) crashed 29.1% in January, according to data provided by S&P Global Market Intelligence. The stock market hit a patch of volatility last month, but Coupang was hit especially hard. The catalyst? The threat of rising interest rates.
Image source: Getty Images.
So what
Inflation is running hot right now in countries around the world as consumer prices lap their depressed levels from a year ago (before COVID-19 vaccines were widely available). In an attempt to dial the inflation rate down, the Federal Reserve said it will increase its benchmark fed funds short-term interest rate this year, in several steps, likely starting in March. Higher interest rates don't just cool off the economy overall -- they also lower the present values of stocks, especially those of fast-growing businesses.
Beyond the impact of those looming Fed rate hikes, South Korea's central bank has actually been ahead of the curve in the fight against inflation. Since August, it has been boosting its own base interest rate gradually back up to 1.25% -- the level where it was prior to the pandemic -- with its most recent hike coming in January.
In the case of Coupang, it isn't just a fast-growing e-commerce giant. It's also losing money -- albeit intentionally, as the company is spending intensively to maximize its market share opportunity now, and will worry about maximizing profitability later. Coupang generated negative free cash flow of $867 million over the last 12 months on sales of $17.1 billion. Given the expected increase in interest rates, investors last month were in a particularly "risk-off" mood when it came to shares of companies that are showing plenty of red ink on the bottom line.
Now what
Coupang shareholders have endured quite a bit of pain since its initial public offering last spring. The stock is now down nearly 60% from where it debuted. That said, there are some positive attributes here that might inspire an investor to nibble on the shares right now. For one thing, it's still a very fast-moving company. Revenue grew 48% in the third quarter, and its gross profit on products and services rendered grew at an even-faster 62% pace. That's a good indicator that Coupang is benefiting from economies of scale, and getting more profitable as it gets larger.
Additionally, shares now trade for just 1.7 times trailing 12-month sales. Given that its gross profit margin was only 16% in the last reported quarter, it makes sense that Coupang would trade at a discount to many of its e-commerce peers. However, if it can continue to add more customers and services to its business, there could be a long runway ahead for gross profit growth.
Coupang has a promising outlook. But if you decide to buy some shares now, bear in mind that it's likely to remain a very volatile stock for the foreseeable future.
