Coupang (CPNG 0.35%), a leading e-commerce platform in South Korea, reported its full-year 2022 earnings at the end of February. The company outpaced the overall retail industry in South Korea once again as it continues to put up impressive growth and margin expansion. However, the stock has greatly underperformed investor expectations since going public in early 2021. As of this writing, shares of Coupang stock are down 72% since its first trading day, significantly underperforming the S&P 500 over that time span.
Down over 70% since its initial public offering, is now the perfect time to buy the dip on Coupang stock? I think so.
CPNG Total Return Level data by YCharts
Q4 results: strong growth in local currency
According to the fourth-quarter investor conference call, Coupang's core e-commerce platform gained market share yet again in 2022. Revenue was up 26% year over year in local currency to $20.6 billion, driven by consistent growth in active customers and platform spending per active customer. For reference, in the fourth quarter, active customers were up 1% year over year to 18.1 million with revenue per active customer up 4% year over year in U.S. dollar terms to $294. Given the aggressive deprecation of the South Korean won, customer spending was up significantly more when calculated in local currency.
Why does Coupang continue to gain market share versus its e-commerce and retail competitors? It's simple: Coupang offers a better value proposition to both shoppers and merchants. Like Amazon, Coupang has built a vertically integrated fulfillment, delivery, and warehouse network that enables it to get orders to customers much faster than the competition, and at lower prices. From a merchant perspective, it allows sellers to easily access 18 million potential customers across South Korea while also providing logistics management through Fulfillment by Coupang (FLC), a similar service that Amazon offers to merchants. According to Coupang executives, merchants that move their inventory to FLC on average obtain a 65% boost in sales. That sort of boost can be life-changing to small businesses, which make up the majority of merchants on the Coupang platform.
Where will future growth come from?
With over 18 million active customers last quarter and only 22 million total households in South Korea, Coupang will almost assuredly not see substantial growth in active customers within its home market. Some investors are concerned this will impede Coupang's top-line growth over the next few years as it struggles to add new customers to its platform.
But new customers are only a small part of the Coupang growth story. In 2022, customers that joined Coupang in 2018 spent almost 5 times as much on the platform as in 2018, with the 2019 group at 3.6 times its 2019 amount. This spending has grown consistently each year. If these trends continue, Coupang should be able to consistently grow its top-line revenue by double digits over the next three to five years and beyond even if it never adds a new customer to its platform.
Management has also experimented with moving into new geographical areas like Singapore and Taiwan. While still early days and immaterial to Coupang's consolidated financials today, new markets could provide growth for Coupang at some point this decade.
Valuation: Nothing too crazy
This quarter, management updated its long-term adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin guidance from between 7% and 10% to 10% or higher. While adjusted EBITDA is not the best metric for valuing a stock (especially for a capital-intensive one like Coupang), it is the best investors have at their disposal when modeling this stock's future. Last quarter, Coupang's adjusted EBITDA margin was 4%, up from a negative number from the same period last year, with net income coming in at a positive $102 million.
Assuming Coupang can grow its revenue by 10% for the next three years in constant currency and hit a 10% adjusted EBITDA margin in 2025, the company will be generating $2.7 billion in adjusted earnings three years from now. At its current stock price, Coupang has a market cap of $24 billion. That gives it a three-year forward price-to-earnings ratio (P/E) of just 8.9.
For a company with a consistent track record of market share gains and a huge competitive advantage due to its in-house fulfillment network, I think a forward P/E below 10 -- even if based on an adjusted earnings projection -- is extremely cheap and makes Coupang an easy "buy the dip" candidate for investors today.
