CPNG - Coupang's Strategic Focus: Customer Expansion And Profitability

2023-10-02 12:03:19 ET

Summary

• Coupang's continuous increase in active customers and stable revenue growth rates indicate significant growth potential.
• As Coupang's EBITDA margins improve towards a 10% target, it could achieve substantial free cash flow.
• Coupang is priced at 15x forward estimated free cash flow valuation by the end of 2024.

Investment Thesis

Coupang ( CPNG ) has been a very volatile stock in 2023, and yet, for the most part, it's gone largely nowhere, even as its fundamentals have evidently turned a corner.

In the near term, Coupang is focused on two main tactics, to continue expanding its customer base and drive profitability.

Meanwhile, Coupang remains resolute in delivering an impressive customer experience that allows it to strengthen its foothold in the competitive e-commerce landscape in South Korea.

Indeed, Coupang's approach can be surmised as more selection and increased customer engagement while seeking to unlock further advertising opportunities.

According to my estimates, by the time Coupang exits 2024, this business could be on a path toward $2 billion of free cash flow. This would leave this giant South Korean e-commerce business priced at 15x forward free cash flows.

This multiple looks very reasonable, particularly given that Coupang is likely to be growing at mid-teens to 20% CAGR, as its comparables improve.

For investors looking for diversification outside Western markets, this is a very attractive and profitable business worth considering.

Coupang's Near-Term Prospects

Coupang is a South Korean e-commerce marketplace that offers a wide range of products and services. Coupang provides customers with a convenient platform for purchasing everything from electronics and clothing to groceries and home goods.

However, what truly sets Coupang apart is its innovative approach to logistics and delivery. More specifically, Coupang has developed an extensive in-house logistics network that includes fulfillment centers, enabling it to provide speedy same-day or next-day delivery services to customers across South Korea.

Coupang's near-term prospects are attractive, marked by its commitment to enhancing customer experience and capitalizing on advertising opportunities (more on this soon). The company's focus on customer experience has allowed it to differentiate itself from its competition in a retail market characterized by high prices and limited selection. Indeed, that's one aspect that distinguishes the South Korean market from Western markets, its super competitive commerce environment.

Moving on, as Coupang expands its offerings and leverages its vast selection, unmatched delivery speed, and competitive pricing, it is well-positioned to capture a more substantial share of the massive retail market, projected to reach $550 billion in the next three years.

Furthermore, recently Coupang's advertising business has been a significant growth driver, outpacing its overall business expansion, by nearly twice the rate. Even though Coupang hasn't disclosed advertising revenues, I believe it's reasonable to assume that the margins from this business could probably be in the high 30% operating margin, which is dramatically higher than the overall business.

Moreover, Coupang's ability to provide more selection and engage customers effectively is driving advertising revenue, so advertising works as a virtuous cycle, of a high-margin, self-funding business unit.

Moving on, as the advertising market evolves, Coupang is well-equipped to leverage AI and data-driven strategies to enhance its advertising offerings, thereby driving additional revenue.

I often state that customer adoption curves are more important than revenue growth rates. Case in point, Coupang's Q2 2023 saw its active customers increase 10% y/y. For a business that many had presumed to have already saturated its home country's market, the fact that its active customers are still increasing speaks volumes and is reflective of a company that still has substantial upside left in the business.

As a point of reference, consider these figures for its active customers:

• Q2 2022: +5%.
• Q3 2022: +7%.
• Q4 2022: +1%.
• Q1 2023: +5%.
• Q2 2023: +10%.

As you can see above, all of Coupang's tactics are clearly delivering more value to customers, with its latest active customer figures increasing by 10% y/y.

Now, let's talk about Coupang's revenue growth rates with this framework in mind.

Revenue Growth Rates Stabilize

Coupang's revenue growth rates are not the most exciting, with we take its figures including FX changes. The business is for the most part delivering mid-teens growth rates.

Yes, the business is performing slightly better than this on an FX-adjusted basis, with Q2 2023 up 21% y/y. However, since its market cap is priced in USD, it's more insightful to consider its underlying growth in terms of USD figures.

That being said, it's crucial to remember that Coupang's comparables will be improving from this point onwards , with Q4 2023 up against particularly easy comparables with the prior year.

Consequently, as we look out to early 2024, Coupang could probably have enough steam left to end up delivering high teens or as much as 20% CAGR. And given that context, as we look ahead, this could be a very interesting stock, particularly given its improving profitability.

CPNG's Stock Valuation -- Becoming Increasingly More Attractive

We can see that Coupang's underlying EBITDA margins are steadily improving with time. Coupang believes that it can get its EBITDA margins to 10%. This time last year, that sort of target sounded more like wishful thinking than being based on reality.

However, today, 10% EBITDA margins now look achievable. Accordingly, consider this excerpt from Coupang's earnings call ,

[...] we reached another significant milestone this quarter, delivering in the trailing twelve months $2 billion of operating cash flow and over $1 billion of free cash flow.

[...] In addition, our free cash flow has converged with adjusted EBITDA as promised. We're more confident than ever that we will deliver on our long-term guidance of higher than 10% adjusted EBITDA.

If Coupang indeed reaches its coveted 10% EBITDA margins target by the end of 2024, this could see Coupang's free cash flow reaching a $2 billion run rate as the business exits 2024.

This means that Coupang's close to 20% CAGR, are being priced at around 15x forward free cash flows.

The Bottom Line

Coupang showing signs of improving fundamentals. The company's near-term strategy revolves around expanding its customer base and boosting profitability while prioritizing an exceptional customer experience. Coupang stands out in the competitive South Korean e-commerce landscape due to its innovative logistics network, enabling rapid delivery services.

Additionally, Coupang is capitalizing on advertising opportunities, with its advertising business experiencing remarkable growth, potentially with high operating margins.

The continuous increase in active customers and stable revenue growth rates, despite fluctuations, indicate the company's potential for further expansion. As Coupang's EBITDA margins improve, reaching a targeted 10%, it could achieve substantial free cash flow, making it an attractive investment with a promising 15x forward free cash flow valuation by the end of 2024.

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