Investors love initial public offerings (IPOs). There is excitement around a young company making its debut on the stock market, with investors looking for wild price swings and the famous IPO "pop" in order to get a quick return.
But what if I told you investing in IPOs was a terrible idea? The data on IPO returns is sobering, with an estimated two-thirds of them underperforming the broad market three years after going public. If you buy a stock right after its IPO, the odds are against you.
One company that fell victim to the IPO curse is Coupang (CPNG -0.26%). The e-commerce titan in South Korea is off 70% from all-time highs after going public in 2021. However, if you look at the underlying business fundamentals, Coupang is executing flawlessly right now. This was evident in its recent third-quarter earnings release.
Here's why I think Coupang is a monster growth stock in the making and poised to be one of the world's next technology giants.
Coupang: A force in South Korea
For anyone who lives outside of South Korea, Coupang can be described in basic terms as the Amazon of the country. It's the leading e-commerce platform in the nation and is building a comprehensive suite of products for both merchants and customers that is reminiscent of its North American sibling. In fact, I might argue it has an even better value proposition than Amazon.
Customers of Coupang's Rocket WOW membership get an extreme value for just $4 a month. This includes free shipping on Coupang's own delivery network, with the majority of items eligible for same-day and next-day delivery. Customers who order before midnight can receive items -- including fresh groceries -- by 7 a.m. the next morning. That is significantly faster than Amazon's delivery service. On top of its core e-commerce services, Coupang offers its Rocket WOW members discounts on its food delivery service, Coupang Eats, and access to its complimentary video streaming service, Coupang Play.
It's no surprise then to see Coupang hit 20.4 million active customers last quarter -- a huge portion of the South Korean population of roughly 52 million. Customers spend a lot of money on Coupang, with revenue per active customer growing 7% year over year in the quarter to $303. With a vertically integrated offering and customers who spend boatloads of money, it's not surprising to see merchants flocking to the Coupang marketplace. It's where you can find the most South Korean e-commerce shoppers.
CPNG Revenue (TTM) data by YCharts
All this led to fantastic revenue growth at scale. Over the last 12 months, Coupang generated $22 billion in revenue, up 85% since early 2021. That is $10 billion in new revenue -- mainly from its South Korean customers -- with a dominant position in an e-commerce market expected to reach the hundreds of billions within 10 years. Given this backdrop, I would expect Coupang to continue growing its revenue at an impressive clip over the next decade. In the long run, I wouldn't be surprised to see it become one of the few companies to hit $100 billion in revenue, putting it in the same sphere as current technology giants.
Moving into Taiwan, improving profitability
There's a lot of potential left for Coupang in South Korea, but it's finally making moves outside of its home market. Its second big market is Taiwan, where the company started Rocket WOW delivery for customers and is investing a lot in the region. On the conference call, Coupang executives said that the Taiwan market is growing faster than the South Korean one in the first year after launch, which is a fantastic sign. However, this has led to more losses in Coupang's "Developing Offerings" segment, which posted an adjusted profit loss of $161 million in Q3 compared to $44 million a year ago.
Despite these losses in new offerings, Coupang's consolidated business is starting to get a lot more profitable, likely due to the scale and maturity of the South Korean segment. Gross profit margin improved to 25.3% in Q3, with net income of $91 million. Over the last 12 months, Coupang generated $1.9 billion in free cash flow, which shows it does not need outside financing to meet its growth capital expenditure needs.
Why the stock is cheap
At a market cap of $27 billion, I think Coupang shares are mighty cheap. Over the long term, Coupang believes it can hit a 10% adjusted profit margin. On its trailing $22 billion in revenue, that would equate to $2.2 billion in profits, or an adjusted price-to-earnings ratio (P/E) of 12.3.
All indications are that Coupang will continue to grow its revenue at a fast pace due to opportunities remaining in South Korea and the emergence of Taiwan. If it doubles its revenue over the next five years to $44 billion, its adjusted P/E will have fallen to around 6. A growth stock like Coupang typically gets valued at a much higher P/E, which makes me think there is a lot of upside for Coupang shareholders over the next 10 years.
Don't get scared by the recent price drop. Coupang is a great opportunity for investors at these prices.
