CPNG - Coupang: Cautiously Optimistic Prospects

2023-09-12 04:11:48 ET

Summary

• During the first half of 2023, Coupang posted solid revenue growth of double digits, and its core profitability improved significantly due to warehouse automation and active customer growth.
• eCommerce market share gains and higher-margin retail media could support CPNG's top-line growth and margins.
• Competitive risks are significant.

Coupang ( CPNG ) posted a strong financial performance and I view its prospects as cautiously optimistic. The company has a long runway of growth ahead, but competitive risks are significant and prospects appear baked into the stock.

Company Overview

Coupang is a South Korean technology company often referred to as the "Amazon of South Korea" due to its position as South Korea's leading eCommerce platform, as well as its diversified operations across multiple industries including eCommerce, logistics, video streaming, and food delivery.

Their reportable segments are as follows:

Product Commerce: This segment focuses on tier core retail (owned inventory) and marketplace offerings (third-party merchants), Rocket Fresh (Coupang's fresh grocery business), and advertising products associated with these offerings. Revenues are generated from product sales of owned products, commissions from sales of third-party products, logistics and fulfillment fees, and Rocket WOW subscription fees. This is Coupang's biggest segment, accounting for 96% of total revenues. This segment is profitable with an EBITDA margin of 3% in FY2022.

Developing Offerings: Consists of new initiatives such as Coupang Eats (food delivery and restaurant ordering), Coupang Play (online streaming service), fintech, and international retail operations (in Taiwan), and advertising products associated with these offerings. This segment is currently unprofitable.

1H 2023: Revenues up by double digits YoY, core Product Commerce segment profitability improves significantly

Coupang's revenues are up 14.6% to $11.6 billion for the first half of 2023, driven by a continued increase in Active Customers, growth of which has been accelerating over the past few quarters (up 1%, 5%, and 10% in Q4 2022, Q1 2023, and Q2 2023, respectively).

1H 2023 earnings before taxes amounted to $295 million compared with an EBT loss of $284 million the same period last year. Profitability was driven by their core Product Commerce segment whose segment EBITDA margins improved to 6% in 1H 2023, from 1% the same period last year, supported by warehouse automation investments (such as robotics) which reduced costs.

Free cash flows amounted to $850 million compared with a negative free cash flow in the same period last year.

Looking ahead, Coupang's growth prospects are cautiously optimistic. South Korea's eCommerce market is quite saturated, with as much as 41% of total sales made online according to McKinsey - a relatively high penetration rate. Potential market share gains however may help support growth as rivals are seemingly pulling back on costly investments necessary to support their respective eCommerce businesses, ceding market share to more competitive players like market leader Coupang.

Coupang has a few competitive advantages to retain their market-leading position. The platform is known for their "Rocket Delivery" fast shipping service, an advantage Coupang enjoys thanks to their extensive logistics network in South Korea; 70% of Korea's population lives within a 15-minute drive of the company's logistics centers, an advantage rivals like Naver ( NHNCF ) reportedly do not enjoy (Naver and Amazon ( AMZN ) rely on third-party delivery providers like UPS (UPS) and FedEx (FDX) while Coupang has their own fleet of delivery trucks). Coupang Logistics has been consistently taking market share at the expense of market leader CJ Logistics, whose market share is down from 50.1% in 2020 to 44.3% last year. Coupang Logistics, said to be the second-largest delivery firm, commanded a market share of around 36% . It would take considerable time and cost for them to build out comparable distribution infrastructure (and most choice locations may have already been taken up by Coupang), giving Coupang time to solidify their market position.

Coupang's Amazon-style customer service (fast delivery, low prices, frictionless exchanges, and refunds) as well as Prime-like subscription program "Wow membership" (which offers members fast delivery, and video streaming) further locks customers into Coupang's ecosystem.

Retail media opportunity

Consumer privacy concerns and the upcoming elimination of third-party cookies are driving ad spend toward retail media networks, an opportunity Coupang is positioned to capitalize on. South Korea's retail media market, which is valued at an estimated $2 billion, is projected to grow five-fold over the next few years according to McKinsey. Coupang's advertising revenues are estimated at just 1% of their $18.3 billion core commerce revenues in FY2022, a far lower percentage compared to Amazon at roughly 9%.

Advertising could support profitability, may help offset international expansion costs

With advertising typically being a higher margin business compared to retail, Coupang's nascent retail media business could potentially support margin expansion as the business expands and could help offset any impact to margins due to costs associated with Coupang's international expansion efforts. Riding on Taiwan's growing demand for Korean products such as K-beauty and K-food, Coupang ventured into Taiwan as part of their international growth ambitions and is reportedly seeing good traction so far.

Risks

Competitive risks

Retail is one of the most competitive industries, and Coupang's market leadership position may be challenged by rivals. Domestic rival Naver's recent tie-up with the country's biggest logistics player, CJ Logistics, may help narrow their logistics weakness against Coupang. Naver has an edge over Coupang as the country's dominant livestream eCommerce player, with a 60% share. Meanwhile, YouTube launched its first official shopping channel in South Korea a few months ago, marking its official shopping debut in any country.

Chinese eCommerce players meanwhile are gaining traction among South Korean online shoppers as well, particularly in the cross-border eCommerce space (which is growing faster than domestic eCommerce, with South Korea's cross-border eCommerce up 23% versus 4% for domestic ecommerce between 2017-2022) where Chinese platforms may have an advantage due to a larger merchant base of cost-competitive Chinese vendors. In 2022, Chinese goods accounted for 22.7% of South Korea's cross-border eCommerce volume and this share may grow, helped by the various initiatives launched by the Chinese government to strengthen cross-border trade between China and South Korea (such as distribution and trucking line haul services which reduced operating costs and reduced handling time for South Korea-bound deliveries).

Conclusion

Coupang currently has a moderate buy analyst consensus rating.

Their price multiples are considerably higher than the sector medians (forward P/E of 63 versus 14 for the sector, price/book of 11.9 versus 2 for the sector, and price/sales of 1.4 compared with 0.86 for the sector).

Coupang's price multiples are roughly the same as Amazon, a business with arguably lower risk (given their far stronger scale and ecosystem advantages over rivals) and like Coupang well positioned to benefit from the retail media opportunity in its home country the U.S. (the world's biggest ad market), as well as numerous other markets internationally where Amazon enjoys a strong presence. Coupang could be considered a hold for investors willing to tolerate the risks.

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