2021 was a record year for the IPO market. Over 1,000 companies made their debut on public exchanges, with the majority coming from the special purpose acquisition company (SPAC) boom. But now, as we sit at the midpoint of 2022, these excesses have turned into quite the hangover. The Renaissance IPO ETF, which tracks new public companies, is down 50% in the last year, with many stocks down worse than that.
One high-quality company that has gotten dragged down in this mess is Coupang (CPNG 0.82%), the South Korean e-commerce company. Shares are down 46% year to date and 68% since the stock went public in 2021, even though the company continues to put up solid financial results.
Here's why Coupang is my top technology IPO to buy this month.
Coupang: Winning e-commerce in South Korea
Coupang operates a very similar business to Amazon, but tailored to the South Korean market. It has a wide-ranging e-commerce store with everyday items, both sold directly from Coupang but also from third-party merchants who use the platform. It has built up its own warehouse infrastructure and delivery network, with 42 million square feet of infrastructure at the end of 2021. It also has a premium subscription membership called Rocket Wow -- similar to Amazon Prime -- that offers free same-day shipping and other discounts for members. There are around 9 million Rocket Wow members, or around half of Coupang's customer base of 18 million.
With this infrastructure advantage, Coupang can offer e-commerce shoppers a superior experience, which has shown up in its market share gains over the past five years. In 2017, it had 7.4% of the South Korean e-commerce market. By the end of 2021, this had grown to 15.7%. Combine this with an e-commerce market that is projected to grow at 11% a year through 2025, and Coupang is putting up great financial results right now.
In Q1 of 2022, revenue grew 32% year over year on a constant currency basis (which adjusts for dollar gains) to $5.1 billion. This was driven by 13% growth in active customers and 8% growth in revenue per active customer. Considering that a year ago many South Koreans were still quarantined from the COVID-19 pandemic (benefiting e-commerce companies), these are highly impressive numbers for Coupang to put up.
Coupang is more than just packages
But Coupang is not stopping at e-commerce. It has a robust grocery delivery business, with free shipping under the Rocket Wow membership. There is Coupang Eats, a food/restaurant delivery service that has grown like gangbusters in the past few years and utilizes Coupang's network of delivery employees. The company also wants to get into financial technology services through Coupang Pay to lock customers further into its ecosystem. Lastly, Coupang is experimenting with international expansion, notably in countries like Taiwan and Japan.
These new initiatives -- excluding grocery delivery -- have been separated out of Coupang's financials and are aptly named Developing Offerings. Revenue for the segment grew 79% year over year in constant currency in Q1, hitting $181 million in sales. Losses are high, at $94 million in the quarter, but should level out in the next few years. Investors should be watching both the growth and profitability of the Developing Offerings segment to propel Coupang's growth over the next five years.
But what about the valuation?
Coupang is not profitable and doesn't generate positive cash flow, so it is difficult to value the stock right now. This doesn't mean you shouldn't invest in the company; you just have to be a little more creative in what profits you expect it to generate in the coming years. In Q1, Coupang had a consolidated gross margin of 20.4%. Over the long term, it expects gross margin to fit into the range of 27%-32% and adjusted EBITDA margin to hit 7%-10%. With high capital intensity, this likely means Coupang's free cash flow margin will be no more than 5%.
Applying a 5% free cash flow margin to Coupang's trailing annual revenue of $19.3 billion, Coupang would be generating around $1 billion in annual free cash flow right now. At a market cap of $27.6 billion, this isn't dirt cheap, but if you believe Coupang's top line can continue growing at a high double-digit rate, the stock looks like a buy for shareholders looking to hold for the long term.