The top e-commerce company in South Korea, Coupang (CPNG 1.53%), has gone on a wild ride since making its public debut a little over a year ago. Initially, investors were thrilled with the stock, driving its price up nearly 100% on its first day of trading. But a year later, with broad sentiment among the investment community more negative, Coupang stock is down 53% from its IPO price.
Although the stock has gone on a roller-coaster ride, Coupang continues to execute and grow its Asian e-commerce vision. Let's discuss where Coupang might be (the stock and the business) five years from now.
What is Coupang?
Coupang operates a business very similar to Amazon but in South Korea. It has a broad e-commerce website combined with its own fulfillment, delivery, and logistics network that allows it to offer overnight shipping on the majority of shopping items. In fact, its motto is to "wow" customers with how great the experience is from Coupang's service.
Like its North American brethren, Coupang has a premium subscription service called Coupang Wow with about nine million members. On top of the basic e-commerce business, the company has multiple avenues for expansion, including advertising, premium video (to be added to the subscription service), Coupang Pay, food delivery, and grocery delivery.
Strong top-line growth
In the fourth quarter of 2021, revenue grew 34% year over year to over $5.1 billion. As you can see, this business is already quite large and growing rapidly. In fact, it now has an estimated 15.7% market share in its home country, up from just 7.4% in 2017.
There are two things investors should be tracking in the near term with Coupang. First, it will be important to see what revenue growth looks like when COVID-19 restrictions end in South Korea. The country has been very strict when it comes to shutdowns and just experienced a huge wave of cases over the last few months. Like with Amazon, pandemic lockdowns have been beneficial to Coupang's business, so when the pandemic eventually ends in the country, Coupang's revenue growth will likely slow down. The only question is by how much.
Second, investors need to track gross margin and how much it can expand over the next few years. In 2021, gross margin was only 16.0%, down from 16.6% the previous year. But long term, management expects that metric to reach a range of 27% to 32%. Margin expansion will be vital to Coupang eventually generating sustainable earnings for shareholders.
Opportunities for expansion
In order to be a good investment, Coupang will need to grow its top line at a healthy rate for many years. I see two key ways this can happen: expanding outside the core business and moving into new countries.
As I mentioned above, Coupang has a lot of new initiatives beyond the core e-commerce website. Its Coupang Eats food delivery business is growing rapidly with management mentioning it being one of the most downloaded apps in Korea in 2021. Advertising should be a highly profitable business, as it is for Amazon, and can help boost consolidated gross margin over the next five years. But the key thing for investors to understand is with its own delivery and warehouse network, Coupang has the optionality to add on a bunch of new services for its millions of members.
On a longer time horizon, Coupang plans to move out of its home market and into other Asian countries. It is dipping its toe into Taiwan, Japan, and Singapore right now, but none of the areas make up a meaningful portion of the company's overall sales yet. However, if the tests are successful, you can expect Coupang to increase its investments in these areas.
So where will Coupang be in five years?
When looking at an unprofitable business like Coupang, I like to estimate what revenue and gross profit could look like five years from now. Let's say Coupang is able to compound its top-line revenue at a 25% rate off of its $18.4 billion base over the next five years. Let's also say gross margin expands to the low end of its long-term guidance of 27%. In year five, the company will generate about $56 billion in revenue and $15 billion in gross profit. That is compared to $18.4 billion in revenue and only $3.0 billion in gross profit in 2021.
Looking to the stock, Coupang now trades at a market cap of $29.6 billion. If it can reach $15 billion in annual gross profit (net income is too unpredictable given how much the company is reinvesting for growth), it is likely the business would trade at a market cap much higher than $30 billion five years from now. Although these estimates are bullish and will require Coupang to execute at a high level, the potential bodes well for shareholders who plan to hold for the long term.