CPNG - Coupang: Contrarian Bet Increasingly Profitable E-Commerce Player

Summary

• Coupang is an e-commerce player that's taking market share from small competitors. But with investors' risk appetite off the table, this stock has languished.
• Despite the lack of interest in this name, the business has turned a meaningful corner in its operations.
• Coupang is now focused on growing its profitability. And with its multiple compressed, now is a great time to get involved here.

Investment Thesis

Coupang ( CPNG ) is an e-commerce retailer that's taking market share from smaller outfits. As you can see below, retail sales in South Korea have been on average below the mid-single digits. And yet, Coupang is growing meaningfully faster than this.

Furthermore, as we proceed, several viewpoints are explored. I put forward both the bullish and bearish arguments facing Coupang.

On balance, I believe that this name offers a sound risk-reward opportunity. Here's why.

Risk Appetite Rescinded

Investors' interest in overseas investments has decreased as a result of a convergence of circumstances.

One significant factor was the rise in interest rates in the US, which discouraged investors from investing abroad and in long-term investments.

Along these lines, we've recently seen cyclical highly profitable businesses having their day in the sun. And while having those businesses in the portfolio has been very rewarding, investors should be wise and prudent enough to know that what's working right now, may not be what's working in 6 months' time.

And this brings me to my second point, the time to become interested in a company is before others get interested.

To be clear, this doesn't necessarily mean investing in the company at its IPO stage. But instead, the time to become interested in a company is when others are uninterested. This shakes out speculators and traders from their position.

Now, allow me to highlight this:

In the interest of full disclosure, as you can see above, I got bullish on CPNG way too soon. Even if I was prudent enough to avoid this stock at the start of 2021 as its valuation was too rich (only in hindsight), my timing wasn't exactly perfect either, as you can see with the red highlight above.

Nonetheless, we'll turn to discuss CPNG's underlying prospects more fully.

Revenue Growth Rates Plagued By FX

Coupang's revenue growth rates shown above are GAAP figures, not FX-adjusted. Once we remove the impact that the strong dollar had on its Q3 2022 results, revenues would have been up 27% y/y.

Next, we'll discuss the bull and bear case.

The bull case is that even after being a well-known business in Korea, a country with just over 50 million people, Coupang is still, even now 12 years since its founding, growing on the small island.

That being said, at this stage a small number of its active customers would probably be coming from Taiwan, where Coupang is seeking to expand beyond South Korea.

In sum, there's a surprising amount of active customer growth, that wasn't expected to continue for this long.

The bear case is that the original investment thesis had been contingent on substantially cross-selling into its active customer base. And once you strip out the 5% inflation that Korea saw in 2022, you are left with lackluster growth rates.

In essence, not something that's congruent with a high-growth e-commerce marketplace. And that's something that readers should be mindful of.

All that being said, that's not where this story ends.

CPNG Focuses on Profitability

One of the most difficult things a company can do is to change its culture.

A culture of growth that coincides with investors saluting the company's stock on its growth opportunities and then having to shift the culture to one that focuses on profitability takes time. A long time. And certainly not a few quarters.

It's one thing to write in a press statement that the business will be focusing on profits. It's quite another to start to deliver upon that newly found north star.

And yet, that's exactly what CPNG has started to do.

What you see here is a business that has succeeded in leaning into its scale and driving profitability.

Clearly, this is a business that has turned a corner, from negative profitability to positive profitability. With this in mind, let's discuss CPNG's valuation.

CPNG Stock Valuation -- This Story Is Far From Over

At the most superficial level, this business is valued at 1x forward sales.

But this perspective doesn't put much, if any, consideration on the fact that in the past year, CPNG was also being valued at 1x forward sales, see above.

However, the main difference between then and now is that now, Coupang is actually on the cusp of becoming substantially profitable.

So, investors are getting the best of both worlds. Investors are getting some topline growth, but there's at the same time now evidence, that Coupang can report positive profitability.

The Bottom Line

The one-line takeaway is this, Coupang has seen its multiple meaningfully compress. And the risk-reward is the best it's been for a long time.

The more nuanced discussion puts a spotlight on the fact that its revenue growth rates are not that alluring . Particularly given that it's not aligned with the original bullish theme on the stock.

On the other hand, I declare that its valuation has re-rated down, and that now we can start to see the positive impacts of CPNG's renewed focus on driving profitability.

In sum, there's a lot to like here. And this is not the time to lose interest in Coupang.

For further details see: