Another technology player just got into the artificial intelligence (AI) game. Coupang (CPNG 1.98%) recently unveiled its new intelligent cloud computing service focused on AI, which is vying for government funding as South Korea aims to become a cloud computing hub. The e-commerce platform is expanding into another technology field, giving the company an even longer runway to grow.
Similar to Amazon, Coupang has begun in e-commerce and has now taken those resources to build a cloud computing service. Here's why Coupang just became a must-own stock in the technology sector.
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AI cloud computing in Korea
According to its press release, Coupang has been investing in AI computing infrastructure for years to power its warehouses, website analytics, and logistics network. Now, it is beginning to outsource its data centers to third parties. Named the Coupang Intelligent Cloud (CIC), earlier this month management officially unveiled the division, which is a major departure from its commerce platform.
It is curious timing -- and perhaps not coincidental -- to have this announcement come right around when the government of South Korea plans to spend $1 billion on a GPU cluster for AI in Seoul. Coupang is one of the companies vying for this contract, which could kick-start growth for this new endeavor. As a Korean company, the government of South Korea is more likely to choose Coupang for this deal, making it one of the potential candidates to win the contract.
Cloud computing is a huge and lucrative market, which makes it an exciting sector for Coupang to tackle. Just take a look at Amazon, which generates more than $100 billion in revenue from its cloud computing division. This won't happen to Coupang overnight, but the company just massively expanded its addressable market by entering a sector that is now supercharged by the AI revolution.
Taking earnings and reinvesting in hypergrowth
In e-commerce, Coupang still has plenty of room left to expand its operations in South Korea. Its revenue from its original e-commerce marketplace grew 16% year over year last quarter to $6.9 billion, and is still a small slice of the total Korean retail market. With $2 billion in annual operating cash flow, Coupang is now a self-sustaining operator, which gives it the flexibility to reinvest into new revenue segments.
And boy, is it ever reinvesting. It has the newly introduced cloud segment, which can take a lot of capital expenditures as the company looks to build new data centers. There is food delivery, financial technology, video streaming, advertising, and the Farfetch luxury marketplace it just acquired. Most important may be the geographic expansion into Taiwan, which has accelerated revenue growth at the company's "developing offerings" segment to 78% year over year on a foreign currency neutral basis. The segment now does $1 billion in quarterly revenue and should become an increasingly important part of the overall Coupang business in the next few years.
CPNG Revenue (TTM) data by YCharts
Why Coupang stock is a buy
There is reason to be highly optimistic around Coupang's future growth prospects. Its core business is still chugging along, Taiwan and other developing offerings are growing quickly, and it just added this new cloud computing division. From my seat, this sounds a lot like Amazon in the early days, and readers are well aware of how well this stock has performed for shareholders in the last two decades.
Coupang stock is up 41% in the last year, but I think the party is just getting started. At a market cap of $55 billion, the stock trades at what looks like an expensive price-to-earnings ratio (P/E) of 215, but this is misleading compared to Coupang's forward earnings potential. The company generates $31 billion in annual revenue and believes it can reach 10% profit margins once it stops reinvesting for growth.
Given its current revenue growth potential, I think the company can quickly get to $50 billion in revenue and eventually has a path to $100 billion in annual sales. Margins may even end up higher than 10% due to the growth of advertisements and this new cloud computing division.
That $50 billion in revenue and 10% profit margins would result in $5 billion in earnings, or a forward P/E barely over 10 compared to the stock's current market cap. This will happen faster than investors think. Coupang stock looks like a fantastic AI stock to add to your portfolio right now.
