Investing has a way of making you look brilliant and really dumb, often at the same time. The recent initial public offering of Coupang (NYSE:CPNG) stock, by Korea’s largest e-commerce company, is a perfect example.
Coupang sold 130 million shares of its stock on March 10 at $35 a share, higher than the $32-$34 pre-IPO pricing. The IPO raised $3.4 billion in net proceeds for the company. It will use the funds for general corporate purposes.
The e-commerce company’s largest shareholder is Japan’s SoftBank Group (OTCMKTS:SFTBY) through its $100 billion Vision Fund. According to page 178 of the IPO prospectus, it owns 33.1% of the company’s stock.
Sources say SoftBank paid $3 billion for its stake. As I write this, the investment firm’s 33.1% stake is worth $23.8 billion. That’s a nice 41% annualized return on its investment over the past six years.
It will be interesting to see how long Softbank holds on to its shares once all of the lock-up agreements end in September.
What SoftBank does could be a real downer on CPNG stock. Here’s why.
SoftBank Founder’s Bounced Back Nicely
SoftBank’s founder and CEO, Masayoshi Son, ought to be taking a victory lap. It wasn’t too long ago that he was considered a washed-up investor with no new ideas and some real duds on his resume, such as the WeWork debacle and several others.
We’ve yet to get to that point, but there’s no question that Son’s investments are starting to pay dividends for himself and the rest of his SoftBank shareholders. Estimates put SoftBank’s quarterly gains at $30 billion. It reports earnings in mid-May.
In March 2020, I discussed how SoftBank was looking to sell $14 billion of its stake in Alibaba (NYSE:BABA) as part of its plan to shore up its balance sheet and get activist investor Elliott Management off its back.
“Currently, Softbank has $245 billion of assets on its balance sheet, with its 25.5% ownership stake in Alibaba accounting for 53% ($130 billion) of those assets. That’s despite Alibaba stock falling 8% year to date through March 26,” I wrote at the time. “As Alibaba goes, so goes Softbank.”
Since that article, SoftBank’s ADR is up 166%, putting all its detractors to shame.
Coupang and SoftBank
As I said earlier, Softbank first invested in Coupang in 2015. To move on after holding for six years would not be an unusual occurrence. Especially given how much it’s made off its investment.
Consider that Son invested $20 million in Alibaba in 2000 when it was an unknown web portal acting as a middleman between Chinese manufacturers and overseas buyers. Today, it’s worth approximately $152 billion and acts as nice collateral for SoftBank loans.
While Son and Alibaba founder Jack Ma have resigned from sitting on the other company’s board, the reality is that Son knows he’s got a cash machine in Alibaba. It wouldn’t be wise to kill the golden goose.
In the meantime, Coupang investors ought to be paying close attention to what SoftBank does with its CPNG shares.
On the one hand, Son has to be thinking how amazing it would be if lightning were to strike twice. By that, I mean its investment in Coupang turns out to be an even bigger cash machine than Alibaba, making SoftBank’s two biggest investments e-commerce companies.
On the other hand, maybe he feels it’s best not to tempt fate and decides to unload the entire stake immediately after the lock-up ends.
I couldn’t begin to get inside that man’s head. What I do know is that if both parties went their separate ways, neither would suffer too much.
That said, investors watch what the big fish do. If Son sells, you know it will affect CPNG stock in the near term. It’s got to.
That wouldn’t be good for a company trying to branch out from its Korean home base.
The Bottom Line
I don’t think there’s any question that Coupang is growing like weeds. In 2016, it had $1.67 billion in sales. Four years later, it was more than seven times larger at $11.97 billion.
Sure, it’s got massive operating losses – $2.2 billion over the past three years alone – but they dropped by 39% in 2019 and by 18% in 2020.
Until SoftBank waives the white flag and surrenders to its profits, Son is still very much in the e-commerce company’s corner.
CPNG stock is one of those money-losing stocks I don’t have a problem recommending. In the $30s closer to its IPO price would be ideal.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.