Analyst Insight: A Second Look at Coupang

Analyst Insight: A Second Look at Coupang

Morning folks,

I’m continuing to follow up on some of the stocks we originally looked at last year (you know, when companies were actually going public).

Today I’m taking a second look at Coupang — often called the Amazon of South Korea. Like all growth stocks, this business has been absolutely hammered over the past few months. It basically had a good opening week and hasn’t seen those highs since. At one point the stock was down over 76%, but has been showing some positive signs recently. It’s currently sitting at about a third of the valuation it was at when I looked at it last year.

So, as I said, it's called the Amazon of South Korea — but also the Instacart of South Korea, the Doordash of South Korea, the Shopify of South Korea — and that kind of gives you a sense of the multiple businesses underlying Coupang. E-commerce is kind of its front of house, but there’s a huge logistics business behind that — which is why Amazon is usually referenced in any discussion about the company. And one of the things that’s exciting me about that is that South Korea is a great place to have a tech-enabled logistics business.

From my First Look last year:

South Korea is a country of approximately 52 million people. While that’s only about 15% the size of the United States, Korea suits the e-commerce model beautifully. About 50% of the population live in its capital city, Seoul — the world’s fifth-largest urban area. The population is very tech-savvy, with 96% smartphone penetration (the highest in the world), as well as cheap and reliable internet access. Korea also has a workaholic culture, with one of the highest annual working hours per employee in the world.

South Koreans are also quite affluent. This workaholic culture, which often results in people working 12 hours a day, six days a week, means that South Koreans are typically cash-rich but time-poor. This lends itself very well to Coupang’s model, particularly their Rocket Wow service — an Amazon Prime-like subscription that offers next-day delivery. Their Dawn Delivery service even promises goods will be at your doorstep at 7 am the next morning if you order before midnight.

In order to enable that, Coupang has built itself a vertically integrated delivery and logistics business that is unmatched in the country. The company has over 15,000 drivers (the largest fleet in South Korea) and about 40,000 workers in its over 100 warehouses. The company claims that over 70% of its customers are within seven miles of a delivery hub.

Now, obviously, like all e-commerce businesses, Coupang did get a big boost from the pandemic — when they first went public revenue was growing at about 74%. They were growing customers at about 20% and revenue per active customer was growing 44%. However, the company was far from profitable. E-commerce is a low-margin business, particularly when you're selling items like groceries, so they were only keeping about 17 cents on the dollar — and that was gross margin. That doesn’t leave a lot of money in the pot for your operations.

So this really wasn’t a company that you could value on a price-to-sales multiple (with those kinds of margins) and the path to profitability was pretty opaque given the vast amount of money they were investing in their logistics business. Really, this company needed to figure out new revenue streams to try and boost that number. I wasn’t expecting them to come up with their own AWS, but some margin-expanding elements needed to be figured out.

Now, since then, a number of things have happened. The founder of the business, Bom Kim, stepped down as chairman (although he remains CEO). That announcement was very badly timed coming shortly after a firefighter was killed in a blaze at a Coupang warehouse. The company claims he had actually stepped down before that fire but it just hadn’t been announced. This led to a kind of national discussion over working conditions at the company. I’ve never been to South Korea, nor know any South Koreans, but there does seem to be a general mood of dissatisfaction in the country at the moment about working hours and wealth inequality. Coupang seems to have been targeted by campaigners (much like Amazon has been in the U.S.) and there were calls for boycotts.

There were fears that this would turn Coupang from a modern success story to a type of pariah. While top-line growth has certainly slowed in the past year, it seems customers are still rather enamored with Coupang. Revenue growth came in at 27% in its most recent quarter. That’s on a constant currency basis. The strong dollar is playing havoc with a lot of international businesses that report in USD. That’s well down from the 74% it was growing back when lockdowns were still an issue, but it’s far from anemic. It’s also worth noting that the total e-commerce market only grew at 6% in that time frame — so Coupang is at least winning customers.

Another positive surprise was their gross profits, which grew by 75% year-over-year. That included a 2.5% increase in gross margins, which has been put down to its advertising business. That brings its current gross margins to nearly 23% — exactly the kind of momentum we want to see. Some of that was also boosted by a steep increase in its Rocket Wow subscription pricing.

From the most recent earnings call:

In short, the spend of our customer cohorts continues to compound at a fast rate, and we continue to grow at multiples of the overall e-commerce segment in Korea. In just three short years, by 2025, that e-commerce segment is projected to exceed $290 billion in sales. While we’ve grown to significant scale, we remain a small portion of what is expected to soon become the third largest e-commerce opportunity in the world. And our growth is powered by our relentless customer focus. We’ll always strive to make experiences richer and prices lower for our customers.

So while the market may not have the appetite for growth at any costs, it's clear that Coupang’s investments are resonating with its customers. And it does appear that management has identified a path to profitability — at least on an adjusted basis. “At the beginning of the year, we provided guidance of total company adjusted EBITDA losses below $400 million for 2022. We are now raising that guidance to achieve positive adjusted EBITDA for the full year,’ CFO Gaurav Anand said.

I have to say, I’m very impressed with what I see in this business. The company currently commands about 20-25% of the South Korean e-commerce market. While there’s heavy competition, Coupang’s logistics business does appear to be unmatched. That would lead me to believe that growing that market share to over 50% doesn’t sound unreasonable — and the market itself is growing.

However, there are still ESG concerns. I’ll note that the company has taken steps to reduce its carbon footprint, drastically cutting down on cardboard in favor of reusable “eco-bags”. But the company does still seem to be a target in this ongoing discussion about wealth inequality and workers’ rights. How much do customers care about all that? I’m not sure. If we have any South Korean readers out there, let me know your thoughts. For the time being, I’m putting Coupang high on my watchlist of potential entrants to the MyWallSt shortlist.