Coupang (NYSE:CPNG), the South Korean e-commerce giant and one of the largest in Asia, reported another quarter of losses for Q2. A big portion of the loss was from further investments in its business, including a grocery offering company and a food delivery company. But so far this does nothing for CPNG stock, which has kept falling.
So, in this sense, at least Coupang is like how Amazon (NASDAQ:AMZN) ran its business for a long time. That is, Amazon reinvested its cash flow, even though it produced losses. Eventually, the increase in traffic built up into huge free cash flow profits for Amazon.
But in the meantime, CPNG stock has been falling. This is because investors are impatient. They want to see profits each quarter. As a result, the stock is down from a recent peak of $44.54 on July 13, to a recent low of $26.04 on Oct. 4. As of Oct. 13, it was at $26.44.
So Coupang’s stock now looks like it may have bottomed out. But a lot depends on how its cash flow forecast looks going forward.
Key Metrics and Results During Q2
Coupang has been showing good growth in its “Active Customers” base. They define this metric as any “customer” (anyone who has registered an email address) who has ordered at least once during the quarter. This is measured on a net basis, deducting those previous active customers who did not order during the quarter.
For example, last quarter its Active Customers (AC) grew to 17,022, up 26% from the 13,487 reported last year (YoY). Moreover, in Q1, it had 16,037 ACs, which implies a quarter-over-quarter (QoQ) growth rate of 6.14%.
So that works out to an annualized compound rate of 26.9%. This confirms that the company’s basic underlying growth drivers are growing on a stable basis.
This lead to a revenue gain of 71% YoY growth rate, but a 6.45% QoQ growth rate. The latter works out to just 28.4% annually on a compound basis. However, a large portion of the company’s revenue comes during the fourth quarter, so this 28.4% rate does not take that into account. Suffice it to say that analysts still project much higher revenue next year.
For example, 11 analysts surveyed by Seeking Alpha forecast sales will hit $26.55 billion next year, or up 40% over the near-$19 billion forecasts for 2021.
Valuing Coupang Stock
One way to value the company, given its lack of positive cash flow and profits, is to put a multiple on its sales. In my last article, I used a multiple of three times, based on the company’s similarities with Amazon.
So 3 times its $19 billion forecast for 2021 results in a market value of $57 billion. This represents a potential 24.3% gain over its $45.86 billion market value today. This is according to Yahoo! Finance, which uses Refinitiv data to calculate market capitalization.
In addition, we can use the $26.55 billion forecast for 2022 to value CPNG stock. First, however, we have to discount those earnings to bring them back to their present value. For example, using a 15% discount rate for one year results in an 87% discount factor. That lowers the 2022 revenue to $23.1 billion in present value terms.
Therefore, 3 times $23.1 billion equals a target market value of $69.3 billion. This represents a potential 51% gain over today’s $45.86 billion market value.
Now, we have two valuation points: a 24.3% gain using 2021 estimates and a 51% gain using 2022 sales estimates at 3 times sales. The average is a potential 37.7% upside for CPNG stock. That puts its price target at $36.41 per share (i.e., $26.44 price today x 1.377).
What to Do With CPNG Stock
At some point, the market will realize that Coupang’s investments in its business will pay off. They can lead to higher revenue and higher numbers of Active Customers and will lead to positive cash flow.
Given that it is cheap right now, my best estimate is that CPNG stock is worth $36.41, or 37.7% more. This might be a good time for enterprising investors to begin accumulating a stake in the stock now that it is so cheap with such a good expected return.
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.