CPNG - Coupang Stock Earnings Preview: What To Watch For

Summary

• Last quarter saw Coupang achieve a positive net profit for the first time as both gross and operating margins hit record highs.
• This quarter, we hope to see continued improvements in profitability, particularly, more color on its margin accretive advertising and fulfillment businesses.
• We also hope to see continued restraint in its investment in International and continued focus on its domestic market where it stands to reap the benefits of past investments.

Coupang ( CPNG ) has been compared to Amazon for years, particularly for its emphasis and focus on customer obsession. Like Amazon, I believe that Coupang has built the infrastructure for a virtuous flywheel that will allow benefit it for years to come.

Coupang's Business model

Like Amazon, Coupang has created a virtuous flywheel with its Rocket Membership and incredible logistics network at the heart of it. We see that for Amazon in the US (see below), Prime members spend ~4x that of non-members, and this difference is only growing. Thus, it is important to get more WOW members into the Coupang eco-system and this starts with providing incredible value for members.

Source: Quartz

Coupang has been spending to build out WOW member benefits, which now include unconditional free shipping and returns (Rocket Delivery, a vertically integrated logistics network that it has spent over $5 billion building out), delivery of fresh groceries (Rocket Fresh), exclusive discounts and free access to Coupang Play (a video streaming service). Membership costs only 4,990 won a month (less than $4) and this incredible value for the money has helped it reach 10 million subscribers (as of June 2022), more than a quarter of Korea's 37 million online shoppers ( Korea Times ).

With this, Coupang is able to create a virtuous flywheel where it's able to attract the most customers, which in turn attracts more sellers, and its able to have a lower cost structure through economies of scale and upfront fixed costs investments which leads to lower prices and so on.

Things to watch out for

While Coupang's larger focus on first-party commerce has led it to having a lower gross profit margin (24% in Q3, a record) than other more third-party focused companies such as MercadoLibre (45%) or Sea Limited (39%), it has still managed to turn a positive net profit for the first time.

Source: App Economy Insights

I believe that margins, both gross and operating, should only improve as it is largely done with the billions of dollars of investments needed to build out its logistics network. Instead it is now able to expand multiple margin accretive business lines. In particular, Fulfillment and Logistics by Coupang ((FLC)) which allows thousands of merchants to use its logistics network while selling on Coupang and advertising on its platform. Advertising can be a massive part of an ecommerce player's revenue (for example, Amazon's advertising revenue brought in $11.6 billion in Q4). Furthermore, there is a large runway for Coupang to slowly increase the price of its membership fees to match the continued increase in value. Coupang recently nearly doubled membership fees, but it's still only less than $4 a month, a long way to go till it reaches Amazon's $139/year fees.

I am also interested to hear more about its international business, which for now consists of Taiwan. Basically every ecommerce market is already incredibly competitive and crowded, thus, Coupang has smartly tried to establish a niche for itself, through a cross-border online shopping service. This gives Taiwanese customers access to the unique (hopefully) goods sold by Coupang's Korean sellers. Coupang has also stated that investments in Fintech, Play and International, would not exceed $200 million in 2022. Considering, Coupang has also offered free Rocket Delivery in Taiwan (i.e. cross border shipping), I'm not quite sure if it could expand its international presence any further.

However, I believe that there is no need to really expand beyond such tentative forays into low hanging fruits. After all, e-commerce is extremely competitive in every market and I'm not sure that Coupang is able to bring anything unique into these markets without spending billions more (as it did in Korea). Instead, I believe that Coupang would be best served focusing on its domestic Korean market, which benefits from an ideal e-commerce market with a rich and high density population. I think Coupang believes that its focus should be on its Product Commerce business, as its adjusted EBITDA loss for its 'Developing Offerings' segment has already shrunk by half.

Korea's e-commerce market is still expected to grow very quickly, which should provide room for Coupang to continue to grow and take share (it has around 18 million active customers, still some ways to go to reach Korea's 37 million online shoppers). Now is the perfect time to be cashing in on its prior investments, e.g. Coupang now has over 100 fulfillment centers and about 70% of Korean residents live within 10 kilometers of a Coupang fulfillment center ( Korea JoongAng Daily ), while continuing to work towards its long term margin outlook of 7-10% adjusted EBITDA, from its current 3.8% margin (but 4.8% margin for its main product commerce business).

Source: Coupang

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