With only 10% of the retail space per capita compared to the United States, it is fair to say that South Korea is tailor-made for e-commerce due to its lack of room for physical stores. Home to a retail market expected to be worth $550 billion in three years, the country's high population density and tech-savvy citizens create the perfect setting for an e-commerce revolution.
That's where founder-led e-commerce juggernaut Coupang (CPNG -3.74%) steps in.
Founded in 2010, Coupang is home to 19.7 million active customers and already counts nearly 40% of South Korea's population as shoppers. Growing this customer count by 10% in its most recent quarter, Coupang is starting to reveal the potential of its Rocket Wow membership program.
Amassing 11 million active members in just five years after it was started, this membership program may make Coupang the perfect monster stock to buy before it pops.
Coupang's membership powers its ecosystem
Similar to Amazon and its Prime subscription service, Coupang's program offers members a litany of benefits for less than $4 a month. These benefits include:
- Rocket Delivery: unlimited free shipping and free 30-day returns
- Rocket Fresh: grocery delivery within eight hours
- Dawn and same-day delivery on non-fresh items
- Access to Coupang Play for streaming live sports, movies, and TV shows
- An exclusive member discount on select goods released daily, called Gold Box
- Unlimited 10% discount on Coupang Eats, the company's restaurant delivery service
These services form a robust ecosystem that provides immense value to members for less than $50 a year, creating a sticky user base that keeps returning to Coupang for new purchases.
To highlight the power of this ecosystem, consider that the 10% discount on Coupang Eats was merely a trial offering in certain regions less than a year ago. However, the deal became permanent after leading to an 80% spike in members using Coupang Eats and a 20% gain in spending on Eats from members. This is a compelling indicator for the company as Coupang Eats customers spend significantly more on e-commerce and maintain higher membership retention rates -- creating a flywheel effect for growth.
In addition to this flywheel effect, memberships provide Coupang with roughly $500 million in pure free cash flow (FCF) annually. Creating $1.1 billion in FCF over the last year, Coupang is well positioned to continue seeing steady growth, improving margins, and higher cash generation thanks to these members.
Improving margins and rising free cash flow
Having laid out most of the vast logistical network and warehouse infrastructure needed to accommodate South Korea's appetite for online goods, Coupang is beginning to see some significant operational efficiencies. This is reflected in the company's improving gross profit margin.
CPNG Gross Profit Margin data by YCharts.
By streamlining its costs of goods sold, such as warehousing, fulfillment, shipping and handling, and returns, Coupang is starting to reach a scale advantage that lets it add stronger returns from each new customer added. Best yet for investors, these improving margins have flowed through to the bottom line, with the company recording three straight quarters of FCF above $400 million.
Generating an FCF margin of 6% in its most recent quarter (even after removing stock-based compensation), Coupang is well on its way toward reaching management's goal of 10% margins.
How Coupang could pop
As impressive as Coupang's ecosystem and cash generation are, the company's remaining growth options could be equally as exciting.
First, Coupang's fulfillment and advertising services for its merchants grew roughly twice as fast as its overall sales, which rose 21% in the second quarter. These ad sales are a high-margin opportunity for Coupang and build a well-rounded offering for its merchants. Meanwhile, the fulfillment services add incremental sales growth and the potential to add new customers who don't want to be involved with the logistical side of their business.
Second, the company's recent expansion into Taiwan has proven to be an initial success, with Coupang becoming the most downloaded app in the country during the second quarter.
Furthermore, founder and CEO Bom Kim explained, "And in the 10 months since we launched Rocket Delivery, Taiwan has scaled faster than Rocket Delivery in Korea did in its first 10 months post-launch." While this new market is still in its infancy, Taiwan's population of 24 million could prolong Coupang's ongoing growth story, especially if its current adoption rates remain strong.
Best yet for investors, Coupang remains reasonably priced, trading at just 1.5 times sales.
CPNG PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Should the company maintain its FCF margin of 6% for a full year, it would be trading at only 25 times FCF -- an attractive mark, considering it has delivered sales growth of 20% annually over the last two years.
Trading at this fair valuation, Coupang's ecosystem, newfound FCF generation, and budding growth options make it the perfect monster stock to buy before it pops.
