Sometimes referred to as the Amazon of South Korea, eCommerce company Coupang (NYSE:CPNG) is up over 14% in the past trading week due in large part to a better-than-expected Q4 earnings report.
With eCommerce still booming and new markets opening up worldwide, Coupang stock has grabbed the attention of many retail investors, as well as Stan Druckenmiller, who has a full 11% of Duquesne Family Office portfolio in it.
Is Coupang a buy now, and can the company truly become the dominant force in Southeast Asian eCommerce?
Coupang’s Revenue Growth Is Improving
After a period of high revenue growth, Coupang presented concerns for investors in 2022 when its year-over-year top line numbers sank as low as 4.9%.
Though revenues never contracted, it briefly looked as though the eCommerce company was beginning to run out of steam.
The good news for investors is that this was a short-lived state of affairs. Coupang’s sales increased in each of the last four quarters, rising to 23% in Q4. Net revenue for that quarter totaled $6.6 billion, and gross profit increased 32% to $1.7 billion.
These trends suggest that Coupang is still in a relatively high-growth phase of its life cycle. Looking to the coming year, analysts project a further 16.4% increase in revenues.
A further indicator that Coupang is still growing well is the continued expansion of its customer base. Active customer counts increased 16% year-over-year in Q4, and Coupang ended the quarter with over 21 million total customers.
Net Income Is Still Low But Getting Better
In addition to renewed revenue growth, Coupang also has active profitability going for it. The company’s first quarter in the black was Q3 of 2022, and each quarter since has been modestly profitable.
Though Coupang’s trailing 12-month net margin is a very thin 1.9%, there’s a good chance that the company will continue to expand its earnings as its revenues grow and its operations become more efficient.
In 2023, net income totaled $1.4 billion. This included an $895 million non-cash tax benefit, resulting in adjusted net income of $465 million.
Coupang has also seen a marked improvement in cash flows over the last year. Cash flows from operations rose $2.1 billion to a total of $2.7 billion by the end of Q4, and positive free cash flow of $1.8 billion was generated.
Coupang Looks Like a Decent Value Play
As a high-growth eCommerce company that has only recently achieved profitability, Coupang naturally trades at a high multiple to its net income. The stock is priced at 46.2x expected forward earnings and about 233x cash flow.
It’s important to note, however, that Coupang is expected to see its adjusted earnings per share rise by more than 60% over the upcoming fiscal year. Such a high growth rate could offset the stock’s high multiples.
It’s also worth considering the comparatively low price-to-sales multiple of 1.6x. Even Amazon, which is far more mature than Coupang, trades at 3.2 times sales.
Assuming Coupang can continue to drive aggressive revenue growth and extend its margins, it’s possible that the stock could prove to be moderately undervalued.
Can Coupang Build a Moat?
Among the biggest questions for Coupang is whether the company can entrench itself against competition in the South Korean and Southeast Asian eCommerce space. So far, the company has been successful.
Coupang commands roughly one-quarter of the South Korean eCommerce market, making it the biggest player in its home market.
One very positive indicator in this area is the success of the company’s loyalty program. This program, not unlike Amazon’s well-known Prime memberships, has been credited with supporting both customer retention and revenue growth over the past year.
In Q4, the company reported a 27% year-over-year growth in these memberships to 14 million. By leveraging this program, management may be able to keep revenue growth high and fully capitalize on its existing customer base.
It’s also worth noting that Coupang is gradually attempting to expand into a more global business. Though global markets currently account for only a small share of Coupang’s sales, the company is attempting to build a presence in Taiwan, the UK and the US.
Finally, it’s important to consider that there is at least one successful model for Coupang’s attempt to build an eCommerce network in a region that Amazon has historically ignored.
MercadoLibre, a Latin American counterpart, has grown into an $81 billion company, more than double Coupang’s market cap, by becoming South and Central America’s default eCommerce platform.
Bumpy Road Ahead?
On paper, Coupang is a company that offers investors a compelling story, a reasonable value and a long runway for future growth.
It’s crucial to recognize, however, that the road ahead has its fair share of bumps. To begin with, Coupang is far from the only eCommerce company seeking to expand in the Asian Market.
Alibaba and Temu, China’s two online retail giants, are obvious competitors. Though they likely can’t challenge Coupang in South Korea itself, these other companies may be able to limit its growth in the broader Asian marketplace.
Coupang may also suffer from economic headwinds in South Korea. With growth projections of 2.1% and 2.3% in 2024 and 2025, respectively, the country appears to be in for a slow period that could affect consumer spending. Though it’s unlikely that slow growth will continue indefinitely, this could make the next few years more challenging for Coupang.
Why Did Coupang Stock Go Up?
Coupang stock has been going up because net income and cash flow from operations have been rising.
Despite some headwinds, it remains an attractive stock for growth investors who are comfortable with a reasonable level of risk.
With the company already profitable and priced at reasonable multiples to earnings and sales, there could be a bright future ahead for Coupang shareholders as it continues to capitalize on Southeast Asia’s growing eCommerce demand.
Over the next year, though, it’s possible that returns could be slightly slow. Analysts project a 13.9% upside for CPNG shares over the coming year.
While respectable, these returns are much lower than what Coupang delivered over the trailing 12 months. Like all growing eCommerce businesses, Coupang’s power is likely in its long-term compounding capabilities. As such, investors may have to be patient.
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