Technology, cryptocurrency, and artificial intelligence (AI) stocks have taken a tumble in February. Coupang (CPNG 0.17%), on the other hand, largely bucked this trend. In addition to reporting impressive growth for the fourth quarter of 2024 after markets closed on Tuesday, the company has expanded into financial technology, new markets such as Taiwan, and food delivery is leading to robust growth for the platform.
The good news is there's potentially a lot of growth left for the business that just surpassed $30 billion in annual revenue. Still, as of Thursday's market close, the stock was down 2.6% in the two days since the earnings release. Most likely, the market is underappreciating Coupang stock. Here's why.
Impressive across the board
Delving deeper in to the earnings report, Coupang posted strong results across the board. For the fourth quarter, revenue was up 21% year over year to $8 billion, both on an organic and foreign currency neutral basis. Coupang operates mainly in South Korea but is headquartered in the U.S. and reports in U.S. dollars, and can see major tailwinds or headwinds to growth depending on foreign currency movements. Recently, it also acquired the luxury platform Farfetch, driving a onetime boost in revenue growth.
Gross profit growth looks even more impressive, up 48% year over year and still up 29% if you exclude Farfetch and an insurance payout for a warehouse fire. Adjusted gross margin, a measure that focuses on core profitability by stripping off non-recurring or non-operating items, came in at 29%, up from 25% a year ago. This is the sign of a business that's not just growing, but growing profitably.
While major investments in developing new offerings saw Coupang's net income drop to $131 million, full-year free cash flow came in at $1 billion, meaning the company can self-fund growth with its own balance sheet. That's a solid sign of a healthy business.
Speaking of developing offerings, the growth at this division -- which includes international e-commerce, financial technology, and food delivery -- grew revenue over 300% year over year (136% year over year if you exclude the boost from Farfetch revenue). This division is already doing $1.1 billion in quarterly revenue and is growing at a rapid pace, becoming a larger part of the Coupang business over time.
NYSE: CPNG
Key Data Points
More growth ahead from existing customers
The Developing Offerings segment looks promising, but let's not forget the core e-commerce marketplace in South Korea, which still looks quite healthy. According to the company's earnings slides, customers who joined Coupang over six years ago are still growing their spend on the marketplace, with new customers who joined this year starting at higher spending levels.
This is fantastic news for Coupang shareholders and indicates that more growth is ahead for existing Coupang customers. On a foreign currency neutral basis, spend per active customer was up 6% year over year in the period. If these new cohorts act like older cohorts, there will be plenty of years left of growth in spend per active customer.
Oh, and Coupang is still adding new active customers every year. Total active customers grew 10% year over year to 22.8 million in Q4 2024.
CPNG Free Cash Flow data by YCharts.
Why Coupang stock is still cheap
Over the long term, Coupang believes it can reach an adjusted profit margin of 10%. While adjusted figures are not always indicative of true profitability, I think Coupang can be trusted, given its efficient operations and high free cash flow generation while it still reinvests for growth.
Plus, since it collects money from customers before paying out its e-commerce suppliers, it has a great working capital cycle that helps elevate free cash flow.
All this being said, I think Coupang's free cash flow margin can hit 10% or higher as the business keeps maturing. With $30 billion in annual revenue despite major foreign currency headwinds, Coupang can easily surpass $50 billion in revenue within the next few years, due to all the growth factors mentioned above. On a 10% margin, that is over $5 billion in annual free cash flow.
With Coupang's market cap is a little under $43 billion, or just 9x projected free cash flow, the stock seems underrated. This is for a business growing its gross profit close to 30% year over year, and with a Developing Offerings segment growing over 100% year over year. Yes, I still believe the market is undervaluing Coupang stock after this earnings pop. This is a technology giant in the making and a buy for investors today.
