Coupang is making great progress, but there's limited upside in the short term

Many high-profile names that went public during the market boom in 2020 and 2021 have now been forgotten. But this is actually very common for stocks that underperform; investors forget they even exist. Coupang ($CPNG), the Amazon ($AMZN) of Korea is one of these names. It was one of the most high-profile listings of 2021. It raised $4.6 billion and had a stellar market debut as the stock nearly doubled on the first day to $69. The timing was obviously perfect (for the company and insiders).

Fast forward to today, and Coupang is trading at a fraction of the above price. As you can see below, at around $16 per share it's down 66% from the first day of trading. But the stock has also rebounded nicely from all-time lows because the company has started making significant progress on the operating front.

Coupang stock plunged in its first year because it never deserved its IPO valuation in the first place. It may be called the Amazon of Korea because it sells its products online, but its underlying fundamentals have actually more in common with Walmart ($WMT) rather than with Amazon.

So, after the bubble burst, CPNG stock became quite attractive. Coupled with a strong fundamental performance, and great progress toward profitability, the stock bounced back in the second half of 2022. Management over-delivered and helped the stock recover from an 80% drop. While the company's future looks bright, Coupang has limited upside in the short term, and here's why.

A Powerful All-In-One eCommerce Platform

Coupang is by far the largest e-commerce company in Korea. Between 2017 and 2021, it doubled its market share to 15.7%, which is an astonishing performance. This couldn’t happen without the help of deep-pocketed investors who allowed the company to burn billions of $ to gain market share 🔥👍 . As a private company, Coupang raised $3.4 billion primarily from SoftBank to build an infrastructure network that could make it unbeatable. They've actually achieved that.

Over the past 7 years, they invested billions of $ to build a state-of-the-art fulfillment network that now spans across 40 million sq. ft., making it larger than Central Park in New York. The demand for its products and services is very strong, which is why the company has invested so much money in its infrastructure.

Coupang's advanced logistics and fulfillment network, as well as its powerful digital ecosystem, have helped it build a moat that keeps competitors at bay. It's highly unlikely that any company whether it is Amazon or Sea Limited ($SE) will be able to beat Coupang in the Korean e-commerce space. The company has now dominated the market so a potential competitor should burn tons of money to gain market share.

Coupang's competitive advantages are its very low prices, its fast delivery speeds, and its best-in-class customer experience. Offerings like Dawn Delivery that lets users order items online and have them delivered within the same day require advanced logistics and a large fulfillment network. Given that Coupang has spent years building its infrastructure, its e-commerce offerings are now superior to any other competitor.

Like Amazon, Coupang offers a subscription service called Coupang Rocket WOW, which gives customers access to exclusive deals, early access to sales, free shipping within a day, discounts for select items and other benefits. The company continuously makes its platform more attractive by bundling several offerings into the WOW subscription. For example, the streaming platform Coupang Play, which costs $4.21/month is free for WOW subscribers. Coupang is essentially building an ecosystem that makes customers more sticky and extends its moat.

Investments Are Paying Off

Inflation is a global issue and consumers in Korea are also feeling the pinch of rising prices. In 2022, the country's average inflation of 5.1% was the highest since 1998. However, it didn't impact Coupang's growth at all. Perhaps the company benefited from it as its focus on low prices helped it attract more consumers and increased its wallet share. On constant currency, Q3 revenue grew 27% y/y to $5.1 billion, which is an enviable performance in the current uncertain macro environment.

The growth was driven primarily by existing customers who increased their spending on the platform. In Q3, the average revenue per active customer grew 17% y/y, which clearly shows that Coupang continues to gain market share in the e-commerce space in the country. Active customers also increased by 7% y/y in Q3 to 18 million.

Coupang offers a best-in-class customer experience that allows it to grow rapidly even during a tough economic backdrop. On top of that, its big investments in infrastructure have started to pay off handsomely, as in Q3 it delivered its first-ever positive net income 🎊.

The company made a net income of $90.6 million in Q3 translating into a 1.8% net margin, vs. a loss of $324 million in the year-ago quarter. There are several factors behind this solid fundamentals performance. First, operating expenses increased by only 8% y/y during the quarter, and allowed the company to achieve operating leverage. This is because Coupang has completed its expensive infrastructure investments and is now reaping the benefits of its scale.

Second, its gross profit margin spiked to 24.2% in Q3 from 16% in the year-ago quarter. This was by far the biggest contributor to the first positive net income. In general, Coupang is a low-margin business because it sells items at low prices and doesn’t have a high-margin division like Amazon's AWS. But throughout 2022, its gross margins increased significantly because it introduced an FBA-like offering, called fulfillment and logistics by Coupang or FLC.

FLC allows third-party sellers (3P) to post their products on Coupang and the company makes money from fees. This 3P offering boasts a significantly higher margin profile than its bread-and-butter 1P business because the company doesn't need to spend money to buy inventory.

While the current momentum suggests that the gross profit margin will continue to expand in the near future, keep in mind that Coupang is still a low-margin business, with much lower gross margins than its US peer Amazon or its LatAm peer MercadoLibre ($MELI). As you can see below, Coupang's margin profile is actually similar to Walmart's.

This is because the two other e-commerce giants have high-margin divisions that Coupang lacks. So if the company doesn't build more profitable verticals, it'll be difficult for its gross margin to rise above 30%, meaning that profit margins will be stuck in the low to mid-single digits in the best case. There's nothing wrong with these margins but low-margin companies never trade at high multiples.

What About Valuation

Coupang went public at an insane valuation. In its early days as a public company, it traded as high as 7x sales, which is a ridiculously high multiple for a business with razor-thin margins. As we saw above, Coupang's gross margins are very similar to Walmart's margins as both companies compete on price in their respective markets.

Historically, Walmart has traded under 1x sales but Coupang deserves a premium because it grows much faster. At current prices of around $16 per share, CPNG trades at a 133% premium to Walmart’s sales multiple so the upside potential is limited.

What Else

Coupang has disrupted the e-commerce space in Korea by offering a unique customer experience that no other company can offer. It continues to gain market share as people buy more and more from its platform because it offers low prices and super-fast delivery. Even though it already has a dominant market position in the country it will likely continue to gain market share as its infrastructure and advanced logistics provide a very strong competitive advantage.

Also, it may have the potential to expand to other countries in Asia benefiting from the weakness in Sea Limited's business, which has been forced to exit several markets to cut losses. The growth potential is very strong but its low-margin operation doesn't leave significant room for upside in the near term as it already trades at a premium.

I've no positions in the stocks mentioned.

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