CPNG - Coupang: The Battle For Profitability

2023-05-23 07:00:52 ET

Summary

• Coupang puts out a strong earnings result that reflects substantial progress in its fundamentals.
• Despite CPNG's strong performance, the pace of progress is perceived as slow by investors.
• At the core, Company's profitability profile is still far from its target 10% EBITDA margin, leading to investor dissatisfaction.

Investment Thesis

Coupang's ( CPNG ) share price has failed to gain any traction for months. And on top of this, Coupang's recent Q1 results haven't inspired much hope for investors.

At the core of the bear case is the concern over Coupang's competition and the impact this may have on its underlying profitability.

I make the case that investors are concerned about the competition. But on top of that, the fact that it's largely an unknown business (at least amongst US investors). In essence, it has become one too many concerns and investors are losing patience.

Therefore, at the core of the bull case, it's this, Coupang is continuing to perform well, but the pace of progress is slow.

Why Coupang? Why Now

Coupang is a South Korean e-commerce company. Its top value proposition lies in its fast delivery network, offering customers in South Korea fast and convenient same-day or next-day delivery for a wide range of products.

Beyond just delivering products to customers, as Amazon ( AMZN ) would do, Coupang has expanded into food delivery with its Coupang Eats service, similar to Uber Eats ( UBER ).

Also, similar to Amazon, Coupang has a video streaming platform. And its overall penetration into South Korea's overall commerce is still in the single digits.

Revenue Growth Rates Stabilize

The graphic requires interpretation. One could make the case that we have a bull case.

Case in point, on a GAAP basis, including FX headwinds, Coupang's growth rates are now stable.

On the other hand, we have to keep in mind that on an FX-adjusted basis, Coupang's revenue growth rates were up 20%, which was meaningfully slower than the 32% y/y revenue growth rates reported in the prior year's quarter.

While the bear case could point to the fact that this business is no longer seen as a hyper-growth e-commerce player, but as a business that is ''stable''.

While a ''stable'' business is far from problematic when it comes to a stable business, investors also crave to see a high-margin business, and that highlights the next key consideration.

Profitability Profile Far From 10% EBITDA Margin

During the earnings call management reminded investors that:

We're also confident that we can expand margins to our target of 10% or higher adjusted EBITDA, thanks to the long runway we see for operational improvements

Indeed, the goal for Coupang is to reach 10% EBITDA margins.

But as it stands as of Coupang's most recently reported results, at 4.2%, despite delivering tremendous improvement from the prior year, investors wanted even more progress.

In fact, if you think about it, from the 4.2% EBITDA margin right now, and comparing this to Coupang's prospects of reaching 10% EBITDA margins looks like a wide chasm right now.

Furthermore, when asked on the earnings call about its decision to reduce some of its profitability in its Logistic Fulfillment Center (''FLC'') this is what management said:

From a margin perspective, FLC is margin accretive. However, we are reinvesting some of that to market the service and drive adoption at this very early stage.

The Bottom Line

Despite progress in its recent earnings report, investors remain dispassionate towards its stock.

In summary, at the core of the problem of why investors are despondent over Coupang, it's that there's still a lot of heavy lifting to be done, to better balance growth and profitability.

More specifically, Coupang's revenue growth rates on an FX-adjusted basis are starting to slow down. For the most part, this is due to the overall macro environment. Indeed, there was the assertion made on the earnings call that Coupang was growing faster than the overall market.

Where Coupang's CEO Bom Kim declared:

We're growing at a multiple of the market because we're providing something much better through Rocket Delivery [Coupang's super fast, within hours delivery service], wide selection, low prices, convenience and speed.

And yet, investors think to themselves, that Coupang is probably priced at somewhere around 22x forward free cash flows, a multiple that's perhaps too rich for the growth rates it offers. To which, I retort, investors need to have slightly longer time horizons when investing.

For further details see: