Coupang (CPNG -0.52%) is occasionally referred to as the Amazon of South Korea thanks to the similarities it shares with the famous e-commerce giant's retail business. While many companies around the globe try to claim that comparison, Coupang is perhaps the most similar in terms of its actual operations and its management team's approach to investing for the future.
With the stock now down more than 60% from its all-time highs, the market might be giving investors a unique opportunity to buy this South Korean e-commerce leader at an attractive price. Let's take a look.
The Coupang business model
Like Amazon, Coupang sells a wide variety of both owned products and items from third-party merchants. And just as Amazon now does, Coupang also delivers most of its orders through its own in-house delivery network.
But the similarities don't just stop there. Coupang even offers an Amazon Prime-like subscription called the Rocket WOW Membership for less than $4 a month. The membership allows customers to get free shipping on select items, access to exclusive video content through Coupang Play, discounts on Coupang's food delivery network, and much more.
Thanks to Coupang's investments in its logistics infrastructure and the generally dense population of South Korea, more than 70% of South Korea's population live within seven miles of a Coupang logistics center. This enables the company to provide unique offerings like its Dawn Delivery service, where customers can receive their orders before 7 a.m. as long as they order by midnight the night before. This model is proving quite successful as well, as Coupang currently touts nearly 20 million active customers, equivalent to 38% of the country's entire population.
Investing for the long term
Coupang's e-commerce business shouldn't be the only thing that reminds investors of Amazon, though. Coupang's approach to capital allocation also bears a passing resemblance, as both companies share a clear focus on investing for the long term.
In fact, in Coupang's pre-IPO S-1 filing, management said directly, "The true measure of our success will be shareholder value created over the long term." That line sounds starkly similar to Jeff Bezos in his famous 1997 Amazon shareholder letter when he said, "A fundamental measure of our success will be the shareholder value we create over the long term."
But Coupang isn't just saying the right things, either -- it's making real long-term investments as well. This is perhaps best exemplified by looking at Coupang's capital expenditures. Over the last three years, the company spent roughly $2.4 billion on purchases of property and equipment, increasing the size of its logistics footprint from 25 million square feet to 47 million. Additionally, despite that massive expansion, Coupang's employee count only grew by 26% thanks to its investments in automation and efficiency throughout its delivery network.
These investments are helping Coupang to deliver orders more cost effectively as well, evidenced by Coupang's massive gross margin improvement. Since prior to coming public, Coupang's gross margin has gone from 16.8% to 26.1% in the most recent quarter.
CPNG Gross Profit Margin (Quarterly) data by YCharts
A screaming buy
Due partly to the large foreign exchange headwinds Coupang is experiencing, as well as the overall sell-off in tech stocks broadly over the last two years, Coupang's stock sold off significantly since coming public, putting the company's enterprise value (market cap minus net cash) at just $30.7 billion.
After turning the corner to profitability over the last year, Coupang generated roughly 9% free cash flow margins in the most recent quarter, and management believes the company can achieve well above 10% over the long run. Assuming Coupang's management team is correct, applying that level of profitability to the company's current annual sales figure ($22 billion) would result in the company generating more than $2 billion in free cash flow per year. That means Coupang is valued at just 14x its potential earnings.
For a business that has proven it knows how to invest for long-term growth, that valuation strikes me as a very attractive price to buy.
