South Korean e-commerce company Coupang (CPNG -0.52%) has seen its stock fall by roughly 60% since its initial public offering in March 2021. However, with this cost-intensive logistics company now having recorded four straight quarters of positive net income, it looks as though the company is finally starting to turn some heads. In fact, since its most recent quarterly earnings report, the stock has jumped by more than 10%, adding an additional $3 billion to its market cap.
Considering this recent lift in the share price, let's see whether now is the right time to pick up some shares.
What does Coupang do?
Before diving into the most recent financial results, it's probably best to lay some groundwork for what Coupang actually does.
With nearly 20 million active customers, Coupang is the leading e-commerce marketplace in South Korea. And since the company operates its entire delivery and fulfillment network in-house, it often gets tagged as the Amazon of South Korea. Although plenty of companies have tried to claim the "Amazon of" designation, Coupang is perhaps the most truly akin to Amazon's retail business.
Coupang's e-commerce marketplace is home to a vast selection of products ranging from fresh groceries to electronics to fashion and beauty items. Like Amazon, Coupang's digital shelves are stocked with both its own inventory and products from third-party merchants. And thanks to Coupang's early success in raising capital, the company has been able to build out 47 million square feet of fulfillment capacity, which is roughly equivalent to about 816 football fields' worth of delivery space.
This market-leading logistics footprint puts more than 70% of the South Korean population within 7 miles of a Coupang logistics center. As a result, the company is able to deliver nearly 100% of its orders the next day or sooner. And if customers subscribe to Coupang's Rocket WOW Membership program, they can get select items delivered before 7 a.m. as long as they order before midnight the night before.
This unparalleled level of service is clearly resonating with customers as well, as the revenue per active customer has increased 53% in the past three years alone.
Q2 by the numbers
Despite persistent currency headwinds, Coupang delivered impressive results in its most recent quarter. The company's active customers were up 10% year over year to 19.7 million, which is equivalent to 38% of South Korea's entire population. Those active customers also continue to spend more, which helped Coupang deliver a 16% increase in its product commerce revenue this quarter.
But it isn't just the sustained sales growth that's exciting investors. Over the past 12 months, Coupang has improved its free cash flow as a percentage of revenue from -4% to 8%, resulting in $450 million of free cash flow for the quarter. And that isn't coming at the expense of investing in the business either. In fact, Coupang spent $376 million on purchases of property and equipment this quarter, which is more than double the level of a year ago.
With this huge turnaround in profitability, Coupang is demonstrating just how lucrative the e-commerce industry can be in the densely populated South Korean market.
Data source: YCharts
Is it time to buy?
Coupang's management team has stated that it believes the company could reach a 10% margin for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) over the long run. That would be a big improvement from the 5.1% adjusted EBITDA margin Coupang delivered this quarter.
Assuming management is right, that would imply roughly $2.2 billion in annual adjusted EBITDA based on the company's last 12-month revenue of $22 billion. While adjusted EBITDA can sometimes be a misleading indicator of real cash flow, in Coupang's case it actually trails the company's free cash flow. At Coupang's current enterprise value of $33 billion (market cap minus net cash), that means the stock is valued at just 15 times its potential adjusted earnings.
While it takes some optimistic assumptions to believe Coupang can get to that level of profitability, the company has proven that it can operate efficiently and boost margins as it continues to build out its fulfillment network. At just 15 times Coupang's potential adjusted EBITDA, that multiple strikes me as an attractive price to pay for a market-leading business with a clear track record of durable sales growth.
