In a move that’s been done before, Softbank Group (OTCMKTS:SFTBY) used almost all of its $15 billion of Coupang (NYSE:CPNG) stock at the end of October as collateral for a margin loan to fund distributions for its Vision Fund investors. It did so to avoid selling CPNG stock at depressed prices.
Two months later, it appears that the investment firm’s faith in the South Korean e-commerce firm rebounding has been rewarded. So I’d say it’s a perfect time to buy.
CPNG Stock As Collateral
On Dec. 2, Coupang’s share price fell to an all-time low of $25.06, down 28.4% from its March IPO price of $35 a share and 63.7% from its first-day closing price of $69. However, through Dec. 22, it has rebounded by 19% from its early December lows.
As of Sept. 30, the fair value of its Coupang stake was $14.2 billion, according to Softbank’s six-month consolidated financial report (p. 28) issued in November.
That’s a 492% return on its total investment of $2.4 billion.
However, I believe Softbank was wise not to sell some of its stock in October when trading in the high $20s. The taxes that it would have to pay would be significant. In addition, it would lose out on any future appreciation of Coupang’s shares.
SoftBank did the same thing with Alibaba (NYSE:BABA), and although the e-commerce giant has taken it on the chin in 2021 — it’s down 49% year-to-date — it was able to raise $6.83 billion in the first half of its fiscal year through the use of prepaid forward contracts using BABA stock.
While they’re not loans, it accomplishes the same thing: avoiding taxes on the gains. That’s a good thing if you’re a SoftBank shareholder.
It’s Moving Higher
The last time I wrote about Coupang was in late September. At the time, I suggested that aggressive investors buy in the mid-$20s, despite the fact the company faced two significant headwinds: It doesn’t have a cloud business and it’s got a public relations nightmare on its hands for the way it treats its employees.
The first headwind isn’t an issue unless you feel Coupang needs to become the next Amazon (NASDAQ:AMZN) or Alibaba to compete in the world of e-commerce. I don’t believe that’s the case. But, eventually, investors will come around on this front.
The biggest risk to its future share price relates to its human resources and how it will persuade environmental, social and governance (ESG) investors that it’s turned the page on its poor treatment of employees.
Amazon’s been able to skirt its troubles to date despite the fact there’s been ample evidence that it cuts corners to deliver the goods, both literally and figuratively. But, someday, its problems will come home to roost.
The powers that be at Coupang have a case study in Amazon on how not to treat their frontline employees. I am cautiously optimistic the company will learn from history and do the right thing.
Since my September article, Coupang reported healthy sales growth in Q3 2021 — revenues were $4.8 billion, 48% higher year-over-year — while also growing the number of active customers by 20%, the 15th consecutive quarter of customer growth.
Getting back to its treatment of employees, it launched Coupang Care during the third quarter. This gives delivery drivers a minimum of 15 paid days off per year, a five-day workweek, benefits from day one on the job, and education programs to keep them healthy throughout the year.
On the downside, it had a nine-month operating loss of $1.1 billion, up from $385.1 billion a year earlier. But even there, it has a $3.9 billion cash cushion on its balance sheet at the end of September, more than three times its cash in 2020.
CPNG stock is moving higher because the business continues to head in the right direction.
The Bottom Line
It’s never easy to buy growth stocks that are losing money. That’s why I continue to advise that CPNG stock is for aggressive investors who can handle above-average volatility in its share price.
That said, I continue to believe that if you buy in the $20s, even the high $20s, you and SoftBank will both make decent money in the next 18-24 months.
Govern yourself accordingly.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.