Coupang: Buy, Sell, or Hold?

This is going to be a big week for Coupang (CPNG -0.52%) and its shareholders. The South Korean e-commerce leader will report its fourth-quarter results after Tuesday's market close. The stock is essentially where it was in mid-December, when it announced the controversial acquisition of Farfetch. It wrapped up the $500 million deal for the assets of the online luxury apparel retailer by the end of January.

Like many growth stocks that went public when the market was red-hot in early 2021, Coupang is a broken IPO. The e-tailer is trading for half of its IPO price of $35, two-thirds below its peak shortly after its U.S.-listed debut. The stock will be on the move later this week, when the company reports fresh financials. Should you buy now, dump your position before earnings, or hold off until Coupang's financial state becomes clearer midweek. The clock is ticking. Let's take a closer look.

Let's make a deal

It's natural to feel optimistic, dozens of hours away from a critical financial update. Coupang is dominant on its home turf. It was serving 20.4 million customers at the end of September, a 14% increase over the past year. It has one of the best moats in e-tail: 100 logistics centers across South Korea that place it within 7 miles of 70% of the country's population.

It's not just Coupang's fleet of drivers stepping on the gas. After seven consecutive quarters of decelerating revenue growth, Coupang's top line has been accelerating for three straight reports.

Data source: Coupang. YOY = year over year.

Analysts see Coupang growing its net revenue 21% to a record $6.4 billion. This matches its latest quarter's gain, but Wall Street pros have aimed low before. Just three months ago they were targeting a 16% top-line growth spurt.

Coupang's also profitable, sporting a cash-rich balance sheet. The interest income it's collecting is more than triple what it's shelling out in interest payments. Its enterprise value is lower than its market cap, something that even Amazon.com (AMZN 3.43%) -- the company that investors always compare Coupang to -- can't claim.

Image source: Getty Images.

Seoul searching

It's not all rosy when it comes to Coupang. Despite blowout top-line results last time out, the stock still took a 10% hit the day after the report came out. Its third-quarter profit fell shy of expectations, as aggressively expanding in Taiwan weighed on its bottom line. It's true that Coupang is showing some impressive gains early in Taiwan, but investors have seen this before. Coupang got off to a hot start in Japan, but in less than two years it was withdrawing from the expansion market.

Food delivery platform Coupang Eats is also suffering through some indigestion. South Korean takeout delivery apps experienced their first overall decline in transaction volume last year, as rising fees and the opening of the country's economy made ordering in a less attractive option.

I'm still going to side with the bulls here. Coupang stock is historically depressed at a time when its base is growing on record engagement. Its profitability may be suppressed as it builds out the opportunity in Taiwan. There's no way out. It can't afford to go 0-for-2 in international expansion unless it wants to live its life merely as the Amazon of South Korea alone. It has the balance sheet to ride out the growing pains.

Coupang may not seem cheap at 68 times trailing earnings and 40 times forward estimates. However, it's trading for 14 times the $1.9 billion it generated in free cash flow over the past year, a reasonable price considering Amazon's going for nearly 50 times its trailing free cash flow.

The e-commerce company feels that it can grow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to 10% of its revenue over time, up sharply from the 4.4% margin it has scored over the past 12 months. Net revenue customer continues to climb. Coupang may be a broken IPO, but it's far from a broken business model. Momentum suggests another top-line beat, accelerating net revenue growth for the fourth straight quarter despite its near-term margin concerns. Coupang may have burned the bulls the last time it reported, but there seems to be more upside this time with the bar of expectations set low enough to clear convincingly this week.