Coupang's (CPNG -1.74%) stock surged nearly 11% during after-hours trading on Nov. 9 in response to its third-quarter earnings report. The South Korean e-commerce leader's revenue rose 10% year over year (and increased 27% on a constant currency basis) to $5.1 billion, which matched analysts' estimates.
But more importantly, Coupang surprised investors with its first quarterly profit ever. It generated $91 million in net income, compared to a loss of $324 million a year earlier, while its earnings of $0.05 per share cleared the consensus forecast by $0.08. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $195 million also represented a massive improvement from its adjusted EBITDA loss of $207 million a year ago.
Coupang's stable growth and rising profits were encouraging, but its stock remains nearly 50% below its initial public offering (IPO) price of $35. Let's examine its growth rates and valuations to see if it can recoup more of those losses over the next 12 months.
Meet the "Amazon of South Korea"
Coupang was founded 12 years ago, and it established an early-mover's advantage against other South Korean e-commerce platforms by aggressively expanding its first-party logistics network. That expansion made it much easier to fulfill same-day deliveries, since roughly 70% of South Korea's population now lives within seven miles of one of its fulfillment centers.
Like Amazon, Coupang initially only sold its products through its lower-margin first-party marketplace. But just like Amazon, Coupang eventually launched a higher-margin third-party marketplace. Coupang also locks in its shoppers with a Prime-like service called Rocket WOW, which provides free next-day deliveries, early-morning deliveries, food and grocery deliveries, free 30-day returns, access to streaming videos on Coupang Play, and other perks. Coupang ended 2021 with 9 million paid WOW subscribers, compared to its 6 million subscribers at the end of 2020.
Coupang's top-line growth could be peaking
Coupang's revenue soared 64% in 2019, surged another 93% in 2020 as the pandemic forced more shoppers to stay at home, then increased 54% (49% in constant currency terms) to $18.4 billion in 2021. But its top-line growth cooled off as it lapped that growth spurt, and its revenue rose just 14% year over year to $15.3 billion in the first nine months of 2022.
That slowdown has been exacerbated by the rising U.S. dollar, which has risen 16% against the South Korean won over the past 12 months. For example, its net revenue per active customer increased 19% year over year in the third quarter in constant currency terms, but only rose 3% -- its slowest growth rate since its IPO -- on a reported basis in U.S. dollars.
Coupang also seems to be struggling to gain new shoppers in South Korea, which is a highly developed and saturated market with a population of roughly 52 million and a high internet penetration rate of 96.5%. Its number of active customers rose 7% year over year to 17.99 million in the third quarter, but that represented an anemic sequential gain of just 107,000 customers and remained below its peak of 18.11 million active customers in the first quarter of 2022.
But as Coupang's growth cools off, it's strengthening its margins with higher WOW fees and tighter spending strategies. That's why its gross and adjusted EBITDA margins expanded sequentially and year over year to record highs of 24.2% and 4.8%, respectively, in the third quarter. Its adjusted EBITDA has also remained positive over the past two quarters.
Coupang's growth could stabilize in 2023
Coupang reaffirmed its commitment to generating about $400 million in adjusted EBITDA for 2022. That outlook implies it will generate more than $230 million in adjusted EBITDA in the fourth quarter, compared to $170 million in adjusted EBITDA in the first nine months of 2022.
Coupang didn't provide any exact guidance for 2023, and CFO Gaurav Anand acknowledged that its revenue growth "remains hard to predict in these uncertain times" during the conference call. However, Anand also predicted that Coupang would still "generate meaningful profit expansion over time" as it maintained tighter discipline in its longer-term investments.
I believe Coupang's revenue could rise by at least 10% this year even if its growth continues to cool off in the fourth quarter. But if inflation cools off and the dollar stabilizes against the won, I believe its revenue growth could accelerate to the mid teens next year as its profitability continues to improve.
Analysts currently expect Coupang's revenue to rise 13% this year and 17% in 2022. Based on those estimates, Coupang's stock still looks dirt cheap at 1.2 times next year's sales. Amazon, which is expected to generate slower sales growth than Coupang, still trades at 1.6 times next year's sales. Therefore, I wouldn't be surprised if Coupang's stock climbs 30% to 40% over the next 12 months as its business gradually stabilizes.