Coupang Is a Strong Buy on the Dip Despite Reported Losses

When Softbank Group’s (OTCMKTS:SFTBF) Vision Fund sold 57 million shares of Coupang (NYSE:CPNG), it improved the liquidity of CPNG stock. Coupang is one of its greatest picks — the fund earned a ten-fold return on the investment. Plus, it will participate on the upside from here since it still owns 568.2 million.

A close-up shot of a Coupang (CPNG) delivery vehicle.

Source: Ki young / Shutterstock.com

Back in 2016, Vivendi sold its remaining stake in Activision (NASDAQ:ATVI). At the time, Vivendi’s investment limited the stock’s liquidity. As gaming demand grew and capitulated at the height of the Covid lockdown, Activision stock’s valuation soared. CPNG stock has the potential to do the same.

Stock liquidity is not Coupang’s only catalyst ahead. The internet retailer is dominating South Korea. Markets continue to misunderstand the reported losses in the last quarter.

CPNG Stock Is Due to Break Out

In the second quarter, Coupang recognized a big inventory write-off worth $158 million and another $138 million in asset write-offs. This was due to a fire at its fulfillment center, which CFO Gaurav Anand explained on the conference call.

Without the impact of the fire, gross profit was up 86% year-over-year (YOY) to $816 million. The gross margin increased by 140 basis points to 18.2%.

Coupang will deliver on margin expansion over the long term. The business has the scale to support profit growth as it gets bigger. Revenue from advertising will increase business diversification and demand will rise further as Coupang optimizes its product categories. Finally, it will identify operational efficiency without pressuring workers.

In the second quarter, adjusted EBITDA was negative $122 million, of which $120 million was used to scale Coupang’s food services.

Although Covid-related operational costs weighed on results, South Korea can contain the pandemic. Still, operational costs due to Covid could rise if cases counts do not fall permanently in the country.

Fortunately, Coupang is benefiting from strong demand — but meeting it at these levels remains a challenge. Investments in operations will increase capacity and improve customer satisfaction.

Coupang’s Two Big Initiatives

Coupang’s Rocket Fresh is benefiting from strong YOY growth that will contribute meaningfully to margins. The online fresh grocery market is in high demand.

Since Coupang is positioned to expand its market, investors should expect triple-digit growth rates for the next few quarters. CEO Bom Kim said the company will leverage this with investments in infrastructure, technology and processes.

Customers will get the best experience at the lowest cost. That will lift demand further.

Meanwhile, Coupang Eats is a food delivery service that added to EBITDA losses in the quarter. Yet the low online penetration of food delivery in South Korea allows Coupang to grow as it focuses on improving efficiency and enhancing the customer experience. The company will differentiate itself from competitors who are also trying to take market share.

Coupang will invest in technology and process improvements to drive delivery costs lower. This will squeeze competitors as the company leverages its existing infrastructure.

The Risks of Investing in CPNG Stock

Coupang’s two new initiatives in grocery and food delivery are in the early phases. The units may lose money in the near term, but the move will pay off within a few quarters.

The company’s core business is thriving. Revenue is growing. This suggests the firm may cross-promote its food business to core customers.

As a newly-listed firm, insider lockup expiries could introduce selling pressure. For example, Coupang’s lockup period ended on Sept. 7. The good news is that CPNG shares did not fall by much after the lockup was over.

On Wall Street, the average price target is $43.33 according to TipRanks. Analyst opinions may change to the downside, as most did not issue forecasts for a few months. After trading well below the target price, the experts may lower their estimates to narrow the gap from CPNG stock’s performance.

Finally, CEO Bom Kim is young. Serious investors may worry about his relative inexperience. Still, he founded South Korea’s largest e-commerce company and is a controlling shareholder. He is driven to see the company succeed.

Your Takeaway

Coupang is trading well off its initial public offering price. Markets settled at a $40 to $45 share price earlier this year but then lost confidence.

The warehouse fire was an unfortunate turn of events. But beyond the one-time costs, Coupang’s investment in getting back to business as usual will widen its moat. It will also lead to higher operating margins by next quarter at the earliest.

Investors should accumulate CPNG shares on any continued weakness. The stock offers technology investors geographic diversification and will look cheap a few years from now as its business expands.

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.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.


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