CPNG - Coupang: Seriously Focused On 10% EBITDA Margin

2023-04-19 11:52:25 ET

Summary

• Coupang, Inc. stock has gone nowhere and is down significantly since its IPO. Why?
• Because its revenues have fully fizzled out, as its customer growth rates flatten out.
• However, the big catalyst here is that the Coupang, Inc. business is turning around operations and now eyes up to 10% EBITDA margins.

Investment Thesis

Coupang, Inc. (CPNG) is the largest e-commerce retailer in Korea. With its stock down so significantly since its IPO, Coupang has been forced to adapt and change its operations.

Obviously, this takes time. It's one thing to think up the need for change. It's quite another to implement those much-needed changes. And investors are impatient. Demanding more dramatic action. And quicker.

Coupang's management got the message. And now, they are doing everything in their power to maximize the company's profitability profile.

In sum, it's at this intersection where investors are dejected, despondent, and downcast with Coupang's prospects, and the company is doing everything in its might to improve profitability, where the bull case is found.

Why Coupang? Why Now?

Coupang is a Korean eCommerce player. Coupang aims to be the fastest e-commerce delivery service in Korea.

For Koreans, Coupang is a habit. There are other online merchants striving for wallet share, but Coupang is the largest marketplace in Korea. For more than a decade Coupang has been developing and rolling out the logistic infrastructure to service more than 18 million active customers (meaning customers that made a purchase in the last 90 days).

There's been so much said about Coupang's competitors displacing Coupang, and yet, Coupang's figures show that the active customer figures are practically unchanged from the same period last year.

Now, one could make the claim, quite a valid claim, that Coupang isn't valued as a mature business, with no top line growth. After all, investors have substantial hopes that there's more to this story than just flat revenue growth rates.

Revenue Growth Rates Have Fizzled Out, What's Next

Coupang's revenue growth rates shown above are as reported, GAAP figures, not FX-adjusted.

The graphic is a painful reminder that Coupang is no longer a high-growth e-commerce marketplace. There's no amount of PR spin that can convince investors otherwise.

For their part, Coupang declares that it's obsessed with providing value to customers through a wider selection and lower prices compared with its competitors.

Similar to Amazon.com, Inc.'s (AMZN) Prime, Coupang has its Rocket WOW membership, where customers with a membership get free shipping and free returns, plus delivery of groceries via Rocket Fresh.

Indeed, Coupang's management asserted on the earnings call that,

We expect that engagement within and across categories will accelerate with wider selection on Rocket. Our oldest cohorts, while spending nearly twice the amount of our newer ones, are still growing in spend each year as they experience new selection and categories on Rocket.

More specifically, Coupang is determined to improve customer engagement and cross-selling opportunities.

Understanding the Drivers of Coupang's Potential Profits

Coupang has 2 segments. It has its Product Segment and its Developing Offerings.

What you can see here is that nearly all of its revenues come from its Product Commerce. While its Developing Offerings segment are nascent opportunity, the bulk of the revenues here comes from Coupang Eats, its restaurant ordering and delivery service.

What you see above is that despite Developing Offerings being a tiny, small amount of the overall business, it's dragging down Coupang's overall profitability.

Put another way, simply reducing the losses within its Developing Offerings, without anything else happening in the Product segment would rapidly and substantially improve Coupang's profitability profile.

Moreover, as it stands right now, the product segment reports approximately 5% adjusted EBITDA margins. And given the pace of overall company-wide improvement in profitability, Coupang's management stated on the earnings call,

In the past we have shared our long-term adjusted EBITDA guidance of 7% to 10% or higher. In light of the progress we have demonstrated over the past year, we are now updating our long-term guidance to 10% or higher.

In sum, that's now Coupang's goal, 10% EBITDA margins.

CPNG Stock Valuation -- 13x 2025 EBITDA

Let's assume that by 2025, Coupang's company-wide adjusted EBITDA reaches 7%, compared with the 4% it ended Q4 2022.

This could see Coupang on a path toward $2.1 billion of adjusted EBITDA in 2 years' time.

Again, keep in that 7% is the low end of the range that Coupang is aiming for. Also, even though throughout the earnings call Coupang noted that the pace of profit improvement in the very near term is unlikely to match 2022, there's no doubt that Coupang is fully on board with improving its profitability.

The Bottom Line

As we've demonstrated quarter-after-quarter, we are confident that in any scenario, we will continue to grow at a multiple of the market. (Bom Kim, Coupang Founder, Q4 earnings call .)

As reflected in the above quote, Coupang believes that it grow faster than the overall Korean commerce market. The reason to be compelled here is Coupang is now utterly focused on profitability. Given investors' lack of appetite for the stock, I argue that paying 2 years' forward 13x EBITDA is a very fair multiple, leaving Coupang, Inc. stock primed to deliver upside potential.

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