When Coupang (NYSE:CPNG) posted an unexpected write-down in its quarterly report, investors dumped the stock. CPNG stock faced resistance at the $40 level, on the 50-day and key 200-day moving average.
The South Korean e-commerce firm faces plenty of skepticism. Bears have a 5% short float against the stock. The big loss also puzzled shareholders.
Smart investors who look more closely at the results may ignore the loss. Coupang is investing aggressively in two growth initiatives.
CPNG Stock Faces Selling Pressure
Markets reacted irrationally to Coupang’s second-quarter results. The firm posted revenue reaching an $18 billion run rate. Gross profit was $658 million, up 50% from last year. This excludes a $158 million inventory write-off related to a fire at its Deokpyeong fulfillment center.
In July, markets rallied on news of the fire, betting that insurance claims would lift results. Investors reacted negatively to the write-off included in the earnings report.
Other than the one-time cost, Coupang posted 15 consecutive quarters of growth at over 50% year-over-year on a constant-currency basis. Two aggressive initiatives, which accounted for almost all of Coupang’s adjusted EBITDA loss, is a catalyst.
2 New Initiatives
Coupang’s grocery offering, Rocket Fresh, and Coupang Eats, its food delivery offering, accounted for $120 million of the $122 million adjusted EBITDA loss. CEO Bom Kim believes that it is the largest online nationwide Fresh Grocery. It already added 1,000 basis points to margins on a year-over-year basis. Still, in its infancy, the initiative will scale. The business has strong demand. Coupang cannot keep up, so it must invest further to support Fresh.
Costs will not grow as fast as revenue because the Grocery unit may leverage the existing infrastructure. Also, Coupang has more continuous efficiency improvements. This will lead to a margin expansion and reward investors willing to hold CPNG shares for a few years.
Eats is an entirely separate category from Fresh that has tremendous growth prospects. Its business already approximately tripled in the last two quarters. Investors who impatiently sold Coupang will come to regret the decision later. Kim cited the company’s cultural innovation, technology, and operational excellence as the pillars driving the core business and Eats.
Investors may invest instead in Uber (NYSE:UBER), Amazon(NASDAQ:AMZN), or DoorDash (NYSE:DASH). Those seeking country diversification outside of the U.S. should consider Coupang instead.
Risks
Enthusiastic investors often cite a nascent company as the next Amazon. That is a valid comparison because Coupang Wow is similar to Amazon Prime. Still, the technology sector is showing signs of fatigue. Speculators are unwilling to pay a premium on the company’s growing revenue but showing no profits.
The negative macro sentiment may continue to hurt Coupang’s performance. Should CPNG shares keep falling, patient investors may start a small position first. As it falls further, they may add to the core position at a lower price.
Fair Value
Analysts assigned bullish price targets on Coupang after the earnings report. Though they are below the highest price target of $62 (data from Tipranks), the average price target is still $48. When e-commerce giants like Alibaba (NYSE:BABA) and Ozon Holdings (NASDAQ:OZON) are falling, Coupang looks very compelling. Coupang also has a debt-equity ratio in the 0.1 range, comparable to that of Alibaba. Conversely, Russia’s Ozon has a debt-equity ratio of nearly 10.
Coupang is in the early phases of expanding its business in Japan and Taiwan. It is too early to estimate the growth potential in those regions. To minimize risks, the company is experimenting with small investments first. As it tests and iterates the offering in those regions, it will increase its investment to maximize the long-term returns.
For now, shareholders may count on Coupang dominating the South Korean market. It faces no competition. This will give it all the time it needs to deepen its moat.
Your Takeaway
Markets are treating Coupang as speculation. The company had an initial public offering in March. After the initial trading volume surge, daily interest waned. Investors should take advantage of the market’s lack of interest in Coupang to accumulate a long-term position. Neither Amazon nor Alibaba may enter the South Korean market with much success. This will lead to continued margin expansion and profit growth in the next few years.
The growing negative sentiment for technology stocks will hurt Coupang. Now that it trades below its IPO price, the valuations are more favorable than a few months ago.
On the date of publication, Chris Lau 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.
