CPNG - Coupang: 2024 Growth Potential

2023-12-11 04:29:47 ET

Summary

• Coupang's stock price has declined, making it a fair-value investment opportunity.
• The company has excelled in its operations and emerged as the leader in the South Korean e-commerce and retail industry.
• The macroeconomic conditions in South Korea are expected to improve in 2024, providing a tailwind for Coupang's growth.

Introduction

Coupang ( CPNG ) is an e-commerce platform company primarily operating in South Korea. I started covering Coupang in April of 2021 . During this time, I was bearish on the company. I believed the valuation of the company was too high considering the competitive landscape in the South Korean e-commerce market despite the company's strong top-line growth. Then, in January of 2022 , after a massive sell-off, I upgraded my rating on the company to a hold. My reasoning for the hold rating was a massive decline in stock price reducing the risks coming from a premium valuation while casting doubts on the company's ability to be profitable in the competitive e-commerce industry in South Korea. Today, I am upgrading my hold rating to a buy. Not only has the stock price declined further bringing the company to a fair value, but the company has excelled in its operations emerging as the clear leader in the South Korean e-commerce and even retail industry. Further, the company has successfully reported profits during a slowdown in the South Korean economy in 2023 resulting in an increased expectation as the South Korean economy is expected to grow at a faster pace in 2024. Therefore, considering Coupang's improvements in valuation, changes in macroeconomic conditions, and profitability, I believe Coupang is a buy. The company will likely be one of the top-performing stocks and companies in 2024.

Macroeconomic Conditions

Unlike in 2023, a pivot in the macroeconomic environment is expected to provide a tailwind for Coupang in 2024. Coupang's primary operations are in South Korea, and in 2023, the company was operating in a macroeconomic environment that acted as a headwind to the company's operations. According to the OECD , Organization for Economic Cooperation and Development, South Korean GDP, in 2023, is expected to grow by 1.5%, which is a significant decline from the 2022 GDP growth of 2.6%. However, in 2024, South Korea's GDP growth is expected to rebound to 2.1%. This view of a GDP growth rebound is also shared by other organizations including Reuters.

Despite a rather challenging macroeconomic environment in 2023, Coupang performed well. The company's revenue in 2023Q3 grew 21% year-over-year . Thus, given that it is widely expected for Korean economic growth to rebound in 2024 compared to 2023, I believe it is reasonable to argue that the macroeconomic conditions will switch from creating a headwind to providing a tailwind for Coupang.

Operational Excellence

Coupang has performed exceptionally well in recent years both absolutely and relatively. The company reported strong top and bottom-line growth in earnings supported by continuous growth in members. Further, Coupang was able to come out as the dominant player in the competitive South Korean e-commerce industry in recent months cementing the company's position as a key player.

The 2023 Q3 earnings report reflects Coupang's exceptional performance as the company reported a 21% increase in year-over-year revenue to $6.2 billion. In terms of profitability, the company was able to expand its margins. Gross profit increased 27% year-over-year as the gross profit margin increased by 113 basis points, and free cash flow, in the trailing twelve months, was $1.9 billion, which is an increase of $2.9 billion as Coupang only recently started reporting profits. Finally, active customers reached 20.4 million, increasing 14% year-over-year.

Looking at the top and bottom-line growth allows us to see that Coupang is performing well, but how is the company doing compared to its industry peers? While these numbers are impressive, if competitors are reporting better growth and margins, it could mean that Coupang is relatively underperforming.

Fortunately, Coupang is performing well relative to its competitors. In fact, in recent months, Coupang has cemented its position as the clear market leader in the Korean e-commerce market. Coupang has two major competitors in Korea: SSG Group and Naver Corporation.

(I explained what SSG Group and Naver Corporation are in detail in my previous article, so please refer back to this article for more detail. I will only briefly explain these companies and the competitive landscape in this article.)

Naver is the owner of the biggest search engine in Korea competing with Google (GOOG) (GOOGL), and this company partnered with CJ Logistics, the biggest logistics company in Korea, to tackle the e-commerce market. The idea was that Naver would leverage its search dominance to create an open market e-commerce platform while CJ Logistics takes care of the physical movement of the goods. Then, there is SSG Group, a conglomerate that owns E-Mart, G-Market, eBay Korea, and other retail assets including one of the biggest department store chains, a baseball team, etc. SSG Group wanted to leverage its physical presence and recently acquired G-Market to challenge Coupang.

Soon after the pandemic, I believed these competitors would hinder the growth of Coupang as they are household names in Korea. It is nearly impossible to avoid using services from these conglomerates as their influence on Korean society and economy is monumental. However, today, it is evident that Coupang is winning in the e-commerce competition by a wide margin.

First, SSG Group is currently struggling. SSG Group holds the Walmart ( WMT ) of Korea, E-Mart and they acquired an e-commerce platform G-Market to leverage these assets to win the e-commerce race. During the pandemic, it was widely believed that SSG Group would be one of the dominant players in the market along with Coupang and Naver. However, the time has proven that this was not the case. 2023 year-to-date, G-Market's monthly active users declined 14% while Coupang, as stated earlier, reported strong growth in active users. Further, SSG Group as a whole reported a 13% decline in net income and revenue year-over-year. This could mean that the conglomerate may not be able to allocate enough resources in the e-commerce portion of the business to stay competitive as the conglomerate's main retail business is in peril.

(The source link provided is in Korean, please let your browser translate the website to your preferred language)

Naver is in a better position than SSG Group; however, relative to Coupang's recent performance, Naver is also lagging behind Coupang. Excluding recent acquisitions, Naver's commerce business grew 14.7% year-over-year compared to Coupang's 21%. For the past few quarters, the discrepancy in these two companies' growth rates was in Coupang's favor.

Overall, Coupang's performance has been impressive both absolutely and relatively. The company's top and bottom lines grew rapidly while its key competitors were struggling to find a footing or growing at a slower pace than Coupang. Therefore, it is reasonable to argue that the company's growth will continue in 2024. Competition is consolidating as the third biggest e-commerce player is struggling while Coupang is turning out to be the leader in the industry with faster growth than the second biggest competitors.

Financials and Valuation

In addition to Coupang's strong operations and potential positive macroeconomic tailwinds, Coupang boasts favorable valuation multiples and balance sheet health.

Coupang's balance sheet is extremely healthy. The company has $4.86 billion in cash or cash equivalents and $11.56 billion in total assets. On the other hand, Coupang's long-term debt stands at only about $527.7 billion and a total liability of about $8.63 billion bringing the total liability to asset ratio of about 74.65%. Further, as a result of a strong cash position with little debt, the company during 2023Q3 earnings, reported a net interest income of $50 million. As such, Coupang has an extremely healthy balance sheet that could sustain the company's operations and likely allow the company to withstand some market turbulences.

In terms of valuation, Coupang has a 2024 forward price-to-earnings ratio of about 34.64 . In comparison, Amazon, also operating an e-commerce business, has a 2024 forward price-to-earnings ratio of about 35.54. Amazon indeed has an AWS business, so the direct comparison between the two companies may not be the most relevant. However, even when considering this fact, Coupang is expected to grow its bottom line by about 78% year-over-year compared to Amazon's 29%. Therefore, considering the above factors, valuation multiples, and bottom-line growth expectations, I believe there will be more upside potential to Coupang's valuation.

Risk to Thesis

I believe Coupang will be enjoying a tailwind from the changing macroeconomic condition and the competitive landscape along with the company's continual trend of improving both the top and bottom lines. However, in the short to medium term, the company's profitability could be challenged by the build-out of the Taiwan operations. During the 2023 Q3 earnings call, the management said that the development offerings reported an adjusted EBITDA loss of $160 million for the quarter. The management team also says that the company "anticipate[s] the losses for Developing Offerings in the fourth quarter [to] be lower than the level of losses we saw this quarter;" however, given that the infrastructure build-out for an e-commerce business tend to be extremely capital intensive as seen with Coupang earlier in Korea, serious expansion into Taiwan is expected to be costly for the foreseeable future.

Summary

Coupang, in my opinion, is a buy. The macroeconomic conditions are expected to change from creating headwinds to tailwinds in 2024. And, along with this trend, the company has successfully reached profitability while cementing its market leadership position.

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