Coupang (NYSE:CPNG), which calls itself one of the largest e-commerce companies in Asia, trades for less than 3 times sales. This is much lower than Amazon (NASDAQ:AMZN) which trades at 3 times 2022 forecast sales. CPNG stock has not been trading very well since it went public in early March at $35. As of June 28, the stock was at $38.25, or barely above where it went public.
Coupang delivered mediocre results for Q1. Although revenue was up 74% on a reported basis, and 63% on a constant currency basis, it was slightly lower than expected. For example, last month on May 3, I wrote an article about Coupang indicating that analysts forecast Q1 sales of $4.29 billion. Actually, the results came in at $4.206 billion, slightly lower.
CPNG Stock and the Problems With Sales
But here is the real problem with CPNG stock: It doesn’t make any profits.
In fact, even on an EBITDA basis (earnings before interest, taxes, depreciation and amortization), the company is still losing money. It lost $295 million in net income during Q1 and also made negative $133 million in adjusted EBITDA.
That means the stock is not likely to move much higher until the company can get its act together. For example, sales estimates for 2022 at $26.45 billion represent a 35.9% growth rate vs. sales forecasts for 2021 at $19.46 billion. Given its $64.8 billion market capitalization, this puts CPNG stock on a price-to-sales (P/S) multiple of 2.6 times.
So, if one were to assume that the stock is fairly valued now, then future growth will likely push CPNG stock higher by the growth rate. It would follow the upward trajectory of sales growth, which hopefully will also lead to future profitability. That is unless the P/S multiple were to fall further.
For example, let’s say that sales grow by 25% in 2023. But if the P/S ratio falls from 2.6 times to 2.2 times or negative 15.38%, CPNG stock would rise by just 9.62% (i.e., 25% – 15.38%). The markets have a way of punishing a stock with limited profitability.
But let’s say that things can turn around. For example, page 100 of Coupang’s final pre-IPO prospectus shows quarterly sales and earnings for the prior 2 years. Its peak quarterly sales were $3.803 billion in Q4 2020. Last Q2 2020 sales were $2.614 billion. So sales rose 45.5% over the space of three quarters last year. If that happens again, and the company can get profitable, CPNG stock will likely get a higher P/S ratio, rather than a lower one.
Where This Leaves Coupang
Last month I pointed out that a reasonable valuation for Coupang would be at 5 times sales. This is much lower than the average P/S multiple for both Amazon and Shopify (NYSE:SHOP). Based on that I put the value of CPNG stock at $77.47 per share.
But now I have changed my mind. This is based on their mediocre Q1 results, the lack of guidance from the company, lower sales estimates and its negative earnings. I think CPNG stock is now worth at best 3 times sales until the company can become profitable. This would give it the same P/S multiple as Amazon.
Therefore, at best, Coupang is worth $79.35 billion. That represents a potential gain of 22.45% over its market cap of $64.8 billion. This works out to a target price of $46.84, or 22.5% over yesterday’s price of $38.25 (June 28). I assume that the company will become profitable with its higher forecast sales.
Analysts have a similar view on CPNG stock as I do. For example, the average of six analysts surveyed by TipRanks.com shows a price target of $47. This is close to my $46.84 price target. So, until Coupang gets profitable, expect to see CPNG move no more than 22.5% or so.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.