Historically, buying stocks right after they have their initial public offering (IPO) has proven to be a high-risk proposition for investors. This risk often stems from the hype around the business being at an all-time high, while there is only limited financial data for the company.
Generally speaking, it is usually wise for investors to wait a few quarters, gathering info from the company's regular earnings reports. With this new data, investors can develop a more robust investment thesis for the stock.
After going public in early 2021 at $35 per share, South Korean-based e-commerce specialist Coupang (CPNG 0.35%) has gradually descended lower -- even below $10 briefly.
However, with a year's worth of earnings reports now behind it and two critical insights from Coupang's most recent quarter, I believe it may be time to buy in.
Image source: Getty Images.
Steadily improving gross margin
Growing gross profits 42% year over year and improving its gross margin 450 basis points quarter over quarter, Coupang posted record numbers for each metric in its first quarter.
Gross margin is vital to Coupang investors as its progress highlights improving efficiencies across its capital-intensive logistical network. Should it continue to optimize these logistics and scale into the massive infrastructure outlay needed to operate its e-commerce operations, Coupang could begin to see significant network effects, especially considering South Korea's high population density.
Best yet for investors, Coupang may be reaching a tipping point in realizing these network effects. Consider the following chart:
Data by YCharts.
While this 3% difference may not look like much at first glance, Coupang's substantial jump in gross profit growth relative to its sales growth in the last quarter shows its operations are beginning to scale. Moreover, through this streamlining of its business, the company potentially sets the stage for future profitability, demonstrating that past investments in warehouses, logistics, and a broader inventory are beginning to pay off.
Thriving e-commerce segment
Thanks in part to this all-time high gross profit margin, Coupang's core product commerce segment posted its first-ever positive adjusted EBITDA during the quarter.
Consisting of Coupang's e-commerce operations and its Rocket Fresh grocery delivery service, the segment not only reached EBITDA profitability, but management expects it to remain profitable going forward. On top of this, CEO Bom Kim explained the best is yet to come, "We believe continued improvements in operational efficiency, supply chain optimization, and scaling of merchant services, among other drivers, will expand our consolidated adjusted EBITDA margins to at least 7% and potentially higher than 10% over the long term."
As the e-commerce segment approaches these long-term guidance goals, it looks to become self-funding for its growth -- allowing management to deploy capital to its fledgling developing offerings segment.
Developing offerings includes Coupang Eats (restaurant ordering and delivery), Coupang Play (video streaming), its fintech services, and advertisements related to these categories. With a cash balance of $3.4 billion and a self-supporting e-commerce segment, Coupang is poised to deliver exciting growth optionality to investors through these non-core operations.
Perhaps more importantly, these additional offerings create a robust ecosystem of services that Coupang can bundle together for its nine million WOW members and 18.1 million active customers.
Now trading at just 1.2 times sales and with analysts projecting over 20% sales growth this year, Coupang's budding EBITDA profitability has me prepared to buy and hold more shares for the next decade.
