Coupang (CPNG 2.58%), one of the largest e-commerce companies in South Korea, posted its fourth-quarter report on Feb. 28. Its revenue rose 5% year over year (and 21% in constant currency terms) to $5.3 billion, but missed analysts' estimates by $70 million. It generated a net profit of $102 million, compared to its net loss of $405 million a year earlier, while its earnings of $0.06 per share cleared the consensus forecast by two cents.

That marked its second consecutive quarter of profitability on a generally accepted accounting principles (GAAP) basis. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it posted a profit of $211 million compared to a loss of $285 million a year ago.

A shopping cart on top of a South Korean flag.

Image source: Getty Images.

Those bottom-line improvements were impressive, but Coupang's stock remains more than 70% below its all-time high from March 2021. It also trades nearly 60% below its IPO price of $35. Let's see if Coupang is worth buying right now.

Coupang's competitive advantages

Coupang was founded nearly 13 years ago, and it was heavily backed by venture capital funds prior to its public debut in 2021. That private funding supported the costly expansion of its first-party logistics network.

Its fulfillment centers are now located within seven miles of roughly 70% of South Korea's population. It locks in its shoppers with Rocket Wow, a Prime-like service that provides free next-day deliveries, early morning deliveries, free returns within 30 days, streaming videos on Coupang Play, food and grocery deliveries, and other perks for a monthly fee.

Coupang ended 2022 with 11 million paid Wow subscribers, compared to nine million subscribers at the end of 2021. That represented 61% of its total active customers, compared to just 50% a year earlier.

Coupang's early mover advantage in logistics, its impressive scale, and the stickiness of its Wow ecosystem give it significant advantages against its competitors. Its closest competitor is Naver, the top search engine in South Korea, which expanded into the e-commerce market over the past few years. eBay, which consistently ranked third behind Coupang and Naver, notably retreated and sold its South Korean unit to the retail giant Shinsegae in 2021.

Slowing growth with rising margins

Coupang, like many other e-commerce companies, experienced a major growth spurt during the pandemic as more people shopped online. But its growth cooled as those tailwinds dissipated, and that slowdown coincided with the impact of inflation on consumer spending over the past year. The strong dollar, which was buoyed by rising interest rates, also exacerbated that pain. On a constant-currency basis, Coupang's revenue rose 26% in 2022. But on a reported basis, it only increased by 12%.

Coupang's number of active customers only grew 1% year over year to 18.1 million in the fourth quarter. Its net revenue per active customer increased by 4% to $294. Those growth rates might seem anemic, but its gross and adjusted EBITDA margins also improved significantly over the past year:

Metric

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Active Customers Growth (YOY)

21%

13%

5%

7%

1%

Net Revenue per Active Customer Growth (YOY)

11%

8%

7%

3%

4%

Revenue Growth (YOY)

34%

22%

12%

10%

5%

Gross Margin

15.9%

20.4%

22.9%

24.2%

24%

Adjusted EBITDA Margin

(5.6%)

(1.8%)

1.3%

3.8%

4%

Data source: Coupang. YOY = Year over year.

During the conference call, Coupang CFO Gaurav Anand attributed those expanding margins to its "investments in technology, infrastructure, supply chain optimization," the automation of some of its processes, and the expansion of its "margin-accretive" products and services. It's also been expanding its higher-margin third-party marketplace to reduce its dependence on its lower-margin first-party marketplace. Many other e-commerce companies -- including Amazon, MercadoLibre, and JD.com -- are adopting that same strategy to boost their margins.

What will happen to Coupang in 2023?

Coupang didn't provide any precise guidance for 2023, but Anand said during the fourth-quarter conference call that the company's long-term adjusted EBITDA margin guidance rose from "7%-10% or higher" to "10% or higher."

The bulls believe that if the macro situation improves and the currency headwinds wane, Coupang's top-line growth could accelerate again. If its margins continue to expand at the same time, its profits will likely soar.

The bears believe Coupang's top-line growth will remain sluggish as the macro headwinds persist, and that it could run out of room to grow as it saturates the South Korean market. Coupang previously took a few baby steps overseas into Taiwan, Japan, and Singapore in 2021, but it will likely rein in its spending on those efforts until the macro situation improves. 

For now, analysts expect Coupang's revenue and adjusted EBITDA to rise 17% and 96%, respectively, in 2023. At its current enterprise value of $23 billion, Coupang still looks relatively cheap at less than 1 times this year's sales and 30 times its adjusted EBITDA. Therefore, it could be a great buy for patient investors who can ride out the near-term volatility.