4 Reasons to Buy Coupang, and 1 Reason to Sell

Coupang (CPNG -2.33%), the largest e-commerce company in South Korea, recently posted its fourth-quarter earnings report.

Its revenue rose 34% year-over-year to $5.08 billion, but its net loss widened nearly fivefold from $83 million to $405 million. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, its net loss still widened from $82 million to $285 million.

That flood of red ink drew the market's attention away from Coupang's robust top-line growth, and the stock remains about 40% below its IPO price of $35. Let's discuss four clear reasons to buy Coupang -- as well as one reason to sell it -- to see if investors are ignoring a multibagger in the making.

Image source: Getty Images.

1. Impressive customer growth

Coupang's active customer count rose 21% year-over-year to 17.94 million in the fourth quarter, marking its 16th consecutive quarter of more than 20% customer growth. Its net revenue per active customer also continued to rise.

Data source: Coupang. YOY = Year-over-year.

The stable growth indicates that Coupang's investments in its logistics network over the past several years, which placed fulfillment centers within seven miles of about 70% of the South Korean population, are paying off.

In 2021, Coupang expanded its total infrastructure by 15 million square feet, representing more expansion than its previous two years combined. That's why its net losses are widening so rapidly. But over the long term, it could rein in its spending as economies of scale kick in.

2. Rocket WOW's rapid expansion

In late 2018, Coupang launched Rocket WOW, a subscription-based service that provides free next-day deliveries, early morning deliveries, free returns within 30 days, free streaming videos through Coupang Play, and other perks. It currently costs 4,990 won ($4.10) per month.

Coupang ended 2021 with nine million paid WOW subscribers, or nearly half of its active customers, compared to six million subscribers a year ago. Coupang likely operates WOW at a loss, but CEO Bom Kim pointed out that those subscribers "purchase with significantly higher frequency and across more categories than non-WOW members" during a conference call last May.

That model makes Rocket WOW comparable to Amazon (AMZN -3.13%) Prime, which locked in more than 200 million subscribers last year. Coupang raised WOW's monthly price for the first time last December, and it could continue raising its fees as it gains more customers.

3. Stable revenue growth

Coupang's revenue rose 54% to $18.4 billion in fiscal 2021. However, that marked a slowdown from its 93% increase in 2020, and its growth decelerated over the past four quarters:

Data source: Coupang.

Yet that slowdown wasn't surprising. Like many other e-commerce companies, Coupang's growth accelerated during the pandemic as more people shopped online, then faced tougher comps as the lockdown measures were relaxed.

4. A bargain bin valuation

Looking ahead, analysts expect Coupang's revenue to rise 26% in fiscal 2022 and increase 24% in 2023. Those growth rates are stellar for a stock that trades at just 1.6 times this year's sales.

By comparison, analysts expect Amazon's revenue to rise just 15% this year, but the stock trades at nearly three times that estimate. eBay (EBAY -1.00%), which is growing at a much slower rate than Coupang and Amazon, also trades at about three times this year's sales.

5. The one reason to sell Coupang: its margins

But unlike Amazon and eBay, Coupang isn't profitable. Its net loss widened from $463 million in 2020 to $1.54 billion in 2021.

In this type of situation, we generally look at a company's gross and adjusted EBITDA margins for some signs of financial stability. Unfortunately, the numbers headed in the wrong direction over the past year.

Data source: Coupang. *Impacted by a fulfillment center fire.

On the bright side, Coupang was still sitting on $3.5 billion in cash and equivalents at the end of 2021. It also expects its adjusted EBITDA loss to narrow from $748 million in 2021 to $400 million or less in 2022, and to turn profitable on an adjusted EBITDA basis by the fourth quarter of 2022.

But investors should take those rosy estimates with a grain of salt since Coupang is still heavily focused on fortifying its domestic business while expanding into overseas markets like Southeast Asia, Taiwan, and Japan.

Is it the right time to buy Coupang?

Coupang still has plenty of growth potential, but it faces intense competition and lacks a clear path toward profitability. It could easily double from its current levels once it generates stable growth with narrowing losses, but I wouldn't accumulate more shares until its financial discipline improves.