With 21 million active customers -- a count that grew by more than 16% last year -- South Korean e-commerce juggernaut Coupang (CPNG 0.83%) has quickly become the sixth-most-powerful brand in its home country. Thanks to its legions of loyal customers, Coupang has doubled its sales since its initial public offering (IPO) in March 2020, and it broke even on the bottom line in 2023.
Despite its promising operational performance as a business, its shares remain 62% below their IPO price. Could this spell opportunity for investors today? Here are four reasons why I think it does.
1. South Korea's population density supports Coupang's margin growth
Coupang may have a natural advantage compared to its e-commerce peers in other countries due to South Korea's high population density. With a population density 15 times higher than the United States, South Korea is almost tailor-made for e-commerce since physical retail space is hard to find and expensive.
However, through Coupang's e-commerce platform -- and by joining its Fulfillment and Logistics by Coupang (FLC) offering if interested -- small and medium-sized enterprises (SMEs) in South Korea can thrive without physical stores. These SMEs account for 75% of the company's merchant count and have flocked to the FLC offering due to Coupang's ability to provide inventory storage and reduce the need for traditional retail shelving space.
After investing heavily in its FLC infrastructure over the last few years, Coupang is finally starting to reap the benefits as its logistical network achieves higher efficiencies each quarter. The company's rapidly improving margin profile reflects these higher efficiencies.
CPNG Gross Profit Margin data by YCharts.
With Coupang's logistical network now covering the vast majority of South Korea, the company is well-positioned to continue growing its margins as it builds on its ecosystem.
2. Coupang's Wow membership program is proving effective
Coupang's subscription membership program, Rocket Wow, grew by 27% in 2023 to over 14 million paying users -- roughly two-thirds of its active customer count.
For around $50 a year, members gain access to free shipping on all purchases, unlimited 30-day returns, grocery delivery (Rocket Fresh), discounts on restaurant orders and deliveries (Coupang Eats), and a streaming service (Coupang Play).
This Wow loyalty program is critical for Coupang. These extra offerings have proven incredibly sticky, making existing members happy to stay and spend more on the e-commerce site each year. Each of its customer cohorts grew their spending with Coupang by more than 15% in the fourth quarter of 2023.
However, the Wow membership program is more than just a customer retention tool. Coupang Play was the most downloaded app in Korea on iOS and Android in 2022 and 2023, showing that its streaming offering is proving to be a great enticement for new users to join Wow.
Image Source: Getty Images.
3. Promising efforts to expand into new markets and verticals
Coupang, armed with a massive $5.6 billion cash hoard, is excited to apply what it has learned in South Korea to new markets and even new product verticals.
After launching full force in Taiwan in October 2022, the company continues to see adoption and growth rates there exceeding those seen when it launched its operations in South Korea. With its customer count and revenue more than doubling in the last two quarters alone, Coupang's Taiwanese operations should reach profitability sooner than its South Korean unit did, according to management.
In addition to expanding geographically, Coupang is testing adjacent product verticals. It recently acquired the beleaguered luxury goods platform Farfetch for $500 million. With over 3,000 brands and 4 million customers, Farfetch has been an innovator in the luxury e-commerce niche, but has yet to reach steady profitability.
Though far from a no-brainer acquisition, the purchase has created an intriguing risk-reward proposition. South Koreans are the world's biggest spenders on luxury goods on a per-capita basis, so combining Farfetch's luxury strategy with Coupang's e-commerce know-how (and financial strengths) could prove successful.
4. Superior growth rates at a below-market valuation
Coupang shares trade at a price-to-sales (P/S) ratio of 1.4, which is in line with recent averages. However, I'd argue that this valuation looks quite reasonable, considering the company's rising free cash flow margin (now 10%) and its 2% net income margin (adjusted for a one-off tax benefit).
Due to the working capital fluctuations in a business like Coupang's, I'd argue its "true" margin lies somewhere between these two metrics -- let's say 6%.
CPNG PS Ratio data by YCharts.
Based on this 6% figure and the company's P/S ratio of 1.4, Coupang could be said to trade at roughly 23 times earnings, which is lower than the S&P 500 index's average of 25. Given that it grew sales by 20% in 2023 and that analysts are expecting 17% growth this year, Coupang's valuation could prove to be too cheap. And this doesn't even account for the possibility that its margins could continue to improve.
Due to these four reasons, I can't help but keep buying Coupang stock with the intention of holding it for decades.
