What happened
Shares of South Korean e-commerce leader Coupang (CPNG 1.16%) was up 7.8% today as of 12:20 p.m. ET. The company doesn't report first-quarter 2022 earnings until tomorrow, May 11, but investors were getting some relief ahead of the report. The stock has been absolutely pummeled and is down 65% year to date and over 80% down from its initial public offering (IPO) in spring 2021.
Image source: Getty Images.
So what
Except for the appointment of a couple of new board of director members, there has been little in the way of financial news from Coupang since the company reported full-year 2021 earnings a few months ago. And therein lies the problem. The market is in turmoil because of inflation, and the U.S. Federal Reserve is aggressively raising interest rates to try and cool off the economy.
Higher interest rates here in the U.S. don't directly affect an e-commerce company in South Korea, so what gives? High-growth companies, especially those that don't yet turn a profit, are being punished. Part of the internal mechanism of the stock market are math equations that value a company based on its long-term cash-generating potential. Interest rates are used to "discount" these cash flows, so higher rates now lower the present value of a company's stock.
As for Coupang specifically, revenue did grow 34% in Q4 of last year to $5.1 billion. However, adjusted EBITDA losses were $285 million, compared to losses of $82 million the year prior. Coupang is growing, yes, but current market sentiment is less than forgiving for companies sinking further into the red.
Now what
The upshot here is that Coupang is expected to continue growing at a double-digit percentage rate as it expands along with the e-commerce market in South Korea. And as it digests some of its spending on infrastructure and other new service initiatives, it will narrow those losses.
Management said the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss should be less than $400 million this year. Coupang had $3.5 billion in cash and equivalents on its balance sheet at the end of 2021, so it isn't at risk of running out of money just yet.
At this juncture, investors need to weigh the company's long-term prospects against the current mood on Wall Street. For what it's worth, Coupang trades for just 0.8 times trailing-12-month revenue as of this writing, but until it proves it can reach profitable scale, don't expect a rally back toward the high IPO price anytime soon.
