It’s easy to take a quick look at Coupang (NYSE:CPNG) stock and write it off. I wouldn’t recommend that.
To state the obvious, Coupang stock isn’t cheap. In fact, its fundamentals look awful.
Even with a pullback since its March initial public offering, the company has a market capitalization of $73 billion.
That’s more than 6x revenue. Sure, other stocks in tech have much higher multiples relative to sales, they also have far higher gross margins. Coupang’s gross margin in 2020 was just 17%.
So, put another way, CPNG trades at about 37x last year’s gross profit, which indeed is one of the higher multiples in the entire market. Net profitability, meanwhile, is nowhere in sight: analysts expect losses even in 2022.
But if you look close, the story behind Coupang remains enormously attractive. There is a clear path toward the company’s ability to grow into this valuation and beyond. Risks are real, both short-term and long-term, but as far as growth stocks go, Coupang looks like one of the best opportunities in the market.
The Growth Opportunity
The shorthand description of Coupang is relatively simple: the company is the “Amazon.com (NASDAQ:AMZN) of Korea.”
The description isn’t wrong, necessarily. Like Amazon, Coupang is the largest e-commerce product retailer in its home country. Like Amazon, Coupang has invested heavily to turn its logistics business into a key competitive edge.
And like Amazon, Coupang has expanded far beyond simply e-commerce. It doesn’t have the cloud offering of its U.S. counterpart, but it has a number of intriguing incremental businesses.
It’s moved into online grocery with Rocket Fresh which, like the core business, is the largest in Korea. Coupang Eats is the largest online food delivery platform. There’s a third-party marketplace business (a la Amazon or eBay (NASDAQ:EBAY)).
In addition, Coupang sees an opportunity to generate significant revenue from advertising. Amazon has had enormous success with a similar initiative. It’s not just that the ad revenues can be material to the top line — they also are enormously profitable.
So yes, Coupang is something like the Amazon of Korea. Admittedly, it’s far earlier in its growth curve, with a slightly different mix of ancillary businesses.
Given that AMZN has been one of the market’s best stocks, that’s obviously a good thing. A story that looks like Amazon plus eBay plus DoorDash (NYSE:DASH) certainly seems like an attractive one.
Is The Market Big Enough?
The simple retort to all of this is: that’s fine, but this still is a company worth $73 billion. The Amazon of Korea is not the Amazon of the U.S., after all.
That’s true. Korea’s gross domestic product is about 8% that of the U.S., and Coupang’s international opportunities seems to be limited. Geography is one key factor: South Korea’s only border is with North Korea.
That aside, the region is crowded. China is an unlikely market for entry; in fact, Alibaba (NYSE:BABA) and, down the line, JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD) are poised to expand across Southeast Asia and beyond.
But there’s still plenty of room for growth in Korea. Coupang’s 2020 revenue was about 0.7% of its country’s GDP. Revenue in Amazon’s North America segment (which does include modest operations in Canada and Mexico) was about 1.1%.
Yet Coupang’s revenue ceiling should be far higher, because competition is far lighter. There are no Korean versions of Walmart (NYSE:WMT) or even Target (NYSE:TGT). In e-commerce, Coupang has 25% market share according to one report after vastly outcompeting rivals last year.
Bear in mind that Coupang’s margins should be better as well. Korea is a far more urban country. It has about 15% the population of the U.S. in about 1% of the landmass.
A denser population is a population that’s easier, and cheaper, to reach. Given that Coupang already has done the heavy lifting required to build a world-class logistics network, it should be able to serve customers profitably.
Coupang Stock Can Be Cheap Enough
The back of the envelope model here is for Coupang to reach revenue of a few percentage points of GDP — think Amazon and Walmart combined — with operating margins in the high single digits, against 4-5% for the U.S. giants.
That in turn suggests something like $50 billion in sales (3% of 2019 GDP) and perhaps $4 billion in operating income. That in turn drives annual net income over $3 billion; a 40x multiple values Coupang at $120 billion.
Admittedly, Coupang already has a market capitalization of $73 billion. This model perhaps doesn’t suggest that much upside.
But we’ve seen with high-quality e-commerce companies that simple models don’t usually capture the potential.
As long as the model suggests some upside, good companies can figure out the rest. Everything we’ve seen so far suggests Coupang is a good company — and growth investors should bet on the company figuring out the rest.
On the date of publication, Vince Martin held a long position in AMZN.