Often drawing comparisons to Amazon (NASDAQ:AMZN) for its utter dominance in its native South Korean market, Coupang (NYSE:CPNG) stock was one of the hotly anticipated initial public offerings.
Thanks to significant backing from SoftBank (OTCMKTS:SFTBY), which owns 35.1% of CPNG through the telecom and tech giant’s Vision Fund, it’s easy to see why investors have been drawn in.
But since its first day of trading, things haven’t looked too bright for Coupang and its equity unit. Yes, on March 11 of this year, CPNG stock closed at $49.25, nearly 41% above its $35 initial offering price.
Therefore, the public market did its “job,” facilitating the IPO pop that early (and privileged) investors seek when taking a gamble on new ventures.
But last week, Coupang shares closed down at $32.04, a worrying 8.4% below the initial offering price. Thankfully, a late surge going into the weekend left CPNG stock at $36.43. It trades this morning closer to $35. Is this the discount that prospective buyers are looking for?
To get to the bottom of this, we must first acknowledge why the much-hyped CPNG stock has gone volatile. For its first earnings report as a publicly traded entity, Coupang brought a mixture of encouraging and eyebrow-raising results.
On the plus side, Coupang rang up total net revenue of $4.2 billion for the quarter ended March 31, which was up 74% from the year-ago quarter. The novel coronavirus pandemic hit South Korea early and hard, so the robust comparison is to be expected. Nevertheless, that’s an impressive growth rate.
On the not-so-pleasant end, though, Coupang suffered a net loss of $295 million, comparing very poorly to the $105 million net loss in the same period one year ago. Despite the red ink on its financials, management vowed to keep expanding.
Is this confidence or is this unnecessary risk-taking?
Coupang Competes in a Tough Market
On the surface, it’s difficult to avoid the temptation of not giving CPNG stock the benefit of the doubt. For instance, Coupang co-founder and CEO Bom Kim is already a superstar. It’s not the easiest thing in the world to secure investment capital from SoftBank. Plus, Amazon doesn’t have a clear road into South Korea because of Coupang.
Those are high honors that shouldn’t be ignored. But they also don’t make the investment narrative for CPNG stock.
According to a Bloomberg report, Kim plans to build on the company’s lead in fast deliveries and broad selections. More specifically, “Coupang aims to add 50% to its e-commerce infrastructure in a single year, compared with what it built since its founding in 2010.”
Obviously, this is going to rack up the net losses, with the idea that in the future, Coupang will become profitable. However, my concern is that it may not be such an easy road.
From the company’s Form 10-Q filing with the Securities and Exchange Commission, Coupang noted:
“We also earn subscription revenue from memberships to our Rocket WOW membership program, which provides customers with access to benefits such as access to Rocket Fresh, no minimum spend for Rocket Delivery, and free shipping on returns, which is also included in net other revenue.”
In particular, I’m hung up on the free shipping on returns. For one thing, the economic situation in South Korea is precarious, with household debt to GDP ballooning to 101.3% in the second quarter of 2020. Pre-pandemic, this figure was below 100%. And throughout 2011, it was no higher than 83%.
Well before the pandemic, young Koreans were getting heavily into debt. This implies two headwinds for Coupang: in the future, perhaps in the near future, retail sales will decline and product returns will increase. That’s a double-whammy that CPNG stock could do without.
CPNG Needs Sensible Leadership
In no way am I a hater of Coupang. I covered this company when it was a private entity and I acknowledged its many positive qualities. At the same time, I also noted that the leadership team was taking financial risks, eschewing profitability concerns for outright growth.
That could work in a credible bull market. But with fundamental weaknesses seeping into the CPNG narrative, I think investors should be careful.
Personally, I’d like to see a few more trading sessions before committing myself to a particular trajectory.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
