For an investment in South Korean e-commerce giant Coupang (NYSE:CPNG) to pay off, the company will have to become profitable. That said, I think CPNG stock is an interesting investment at this point.
For one, the company managed to increase its dominant position in the South Korean e-commerce space during the pandemic. In 2019, Coupang controlled 18.1% of the domestic e-commerce market; that number increased to 24.6% in 2020. Based on that fact alone, there’s plenty for investors to be optimistic about. This company should be able to further fortify its dominance in its home country and improve its overall business.
But that prospect also raises a question: where does Coupang seek growth outside of its own geographical home base? Plus, layered on top of that question is another: when can we expect it to become profitable? Ultimately, the narrative for this company is deeply rooted in these two issues — growing domestically and finding profitability.
Coupang Has Quick But Limited Growth
To understand how this company can continue to grow quickly, you first need to understand the population distribution within South Korea. CPNG has invested heavily to build out the largest business-to-consumer (B2C) e-commerce logistics footprint in the country. Additionally, as it highlights in its S-1 prospectus, “70% of the population lives within 7 miles of a Coupang logistics center.”
That figure makes it easier to understand how the company guarantees that orders placed by midnight will be delivered the following morning.
Another factor that will make it relatively easy for Coupang to quickly increase its market dominance is the concentration of Korea’s population in and around Seoul, the capital. Seoul proper has a population that hovers right around 10 million. Seoul’s metropolitan area, however, houses over 50% of the total South Korean population.
While this can potentially cause some serious housing and traffic issues, the population density is also a boon for Coupang. Simply put, it’s easy for CPNG to serve customers in and around Seoul so quickly because it doesn’t have to travel far to deliver.
Contrast this with Amazon (NASDAQ:AMZN) and the geographic distribution of the United States. That makes the speed with which Coupang can grow far more apparent.
To understand why this company’s growth is limited, however, investors need to look at its ability to expand beyond the country’s borders. True, Coupang already has roughly 25% of South Korea’s domestic e-commerce market. But with that market being particularly fierce, CPNG naturally aspires to expand internationally as well.
Expansion into China won’t be easy — or perhaps even possible. For one, the country is home to national e-commerce powerhouses like Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD), among others. Plus, the story is the same elsewhere. So, Coupang can’t simply export what it does in Korea abroad.
Instead, the company’s best opportunity is to grow where it is and, in doing so, hopefully reach the point of profitability. These two factors truly drive the future position of CPNG stock. After all, the head of global asset allocation at Yuanta Securities, Korea, seems to agree. According to CNBC, Daniel Yoo put it this way:
“What you really need to know is whether or not, in the business environment of Korea and e-commerce, can [Coupang] be able to generate a huge, profitable return on capital.”
But make no mistake — Coupang has room to grow within its home country. The S-1 prospectus notes the following:
“Coupang remains a small percentage of the total retail, grocery, consumer foodservice, and travel spend in the Korean market, which was $470 billion in 2019 and is expected to grow to $534 billion by 2024 […] The e-commerce segment of that total spend was $128 billion in 2019 and is expected to grow to $206 billion by 2024.”
So, this company can increase its market share above the current 25%. As it continues to serve South Korea, CPNG will be able to address an increasingly bigger slice of the pie.
Long-Term Perspective on Coupang
Coupang is likely still years from profitability, that’s true. In the first quarter of 2021, the company recorded revenues of $4.2 billion. That lead to a net loss of $295 million.
However, I still firmly believe in CPNG stock and its ability to provide returns to investors long-term. In South Korean business, power centralizes very quickly. So, once this company hits a critical mass, its fundamental financial issues will do an about-face far more rapidly than one might expect.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.