Since its debut on the public markets a little over a year ago, Coupang (CPNG 0.35%) has gone from beloved IPO stock to left for dead. Along with many other recent IPOs, the stock is down over 60% from its IPO price.
However, its business has continued to put up solid growth numbers at scale. The South Korean e-commerce and logistics platform has gained market share in its home country and is moving quickly with new initiatives like food delivery and financial technology (fintech) services.
Does this divergence between the stock and business results make Coupang a buy? Let's investigate.
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Strong first-quarter results
On May 11, Coupang reported its first-quarter results. Active customers grew 13% year over year to 18.1 million people. On top of this, average revenue per customer grew 8% year over year to $283 in the quarter. This combination of customer growth plus increased spending drove overall revenue up 22% year over year to $5.1 billion.
According to management, Coupang is growing at multiples of the overall e-commerce market in South Korea right now. In 2021, its market share was estimated to be 15.7%, up from only 7.4% in 2017. This is a phenomenal indicator of how people value Coupang's platform in that country and also shows the company has a long way to go if it is to truly dominate the industry.
The top-line numbers looked great, but the most impressive part of Coupang's quarter was its gross margin, which hit 20.4%. This is up from only 15.9% in the previous quarter and shows that the company is gaining operating leverage after making a bunch of investments during the start of the COVID-19 pandemic, which accelerated demand for e-commerce. Investors should track gross margin expansion as it will be important for Coupang's overall profitability in the coming years.
New initiatives have lots of potential
There are 52 million people in South Korea. With 18.1 million active customers (some of which are family accounts with multiple users), there is only a limited amount of customer growth Coupang can still tap into within its home market. This means top-line growth will come in one of two ways over the next decade: growth in per-customer spending and international expansion. Coupang is making investments on both fronts.
To increase average spending per customer, Coupang is adding different services on top of its e-commerce platform and in-house logistics network. These include Coupang Eats (food delivery), Rocket Fresh grocery delivery, video streaming for WOW premium subscribers, and different fintech initiatives. It is also starting to outsource its logistics network through Fulfillment and Logistics by Coupang (FLC), similar to the successful Fulfillment by Amazon (FBA) program.
Internationally, Coupang is making investments to build out a similar e-commerce network in countries like Japan, Taiwan, and Singapore. These markets will have more competition than in South Korea but could end up being drivers of top-line growth three to five years from now.
Coupang separates these new initiatives into its "Developing Offerings" category on its financial statements. The segment grew net revenue 79% year over year on a constant-currency basis to $181 million in the first quarter. This is much smaller than the close to $5 billion the core business generated in the same quarter but has the potential to grow at a high rate for many years to come.
Price is highly attractive
With the stock down over 60% from its IPO price, Coupang now has a market cap of $23 billion. It has burned approximately $1 billion in free cash flow in the past 12 months as it invests for growth, which might make investors nervous about the long-term viability of this business. However, it has over $3 billion in cash on its balance sheet, giving the company ample runway to continue with this heavy spending. Eventually, investors need to start seeing the company generate positive cash flow, though.
With trailing 12-month revenue of $19.3 billion, Coupang stock trades at a price-to-sales ratio (P/S) of 1.2. This is much lower than the market average of 2.5 and could prove rather cheap if the company can hit management's long-term target for 7% to 10% profit margins. With strong revenue growth and expanding gross margins, Coupang stock could be a great buy-and-hold investment right now.
