At first glance, Coupang’s (NASDAQ:CPNG) under-performance after its initial public offering and its still high market capitalization will scare away cautious investors. CPNG stock trades at high multiples because it is in the early phases of growth. Revenue is growing quickly but the company is still posting losses.
The South Korean-based e-commerce firm is willing to spend more than it takes to fuel future growth. Its most recent quarterly earnings report re-affirms its prospects are still getting even stronger in the Asian region
Revenue Growth Will Lift CPNG Stock
CPNG stock posted revenue growing by 48% year over year. Its active customers are the engine to its business, growing at least 20% Y/Y for 15 straight quarters. The online giant is growing at multiples faster than the country. South Korea’s GDP growth rate expanded by 0.3% in the three months to Sept. 2021. It must invest in logistics and labor to ready its platform for the growth ahead.
In each of the six past quarters, Chief Executive Officer Bom Kim said that retail product level profits exceeded operational costs. Coupang’s business is growing because its highest profit categories are growing the fastest. It spent $95 million in labor and operational costs to handle the increased Covid-19 cases in Korea in Q3. It invested in infrastructure, which increased capacity. Due to timing, CPNG stock could not use that capacity. When the centers are ready, the infrastructure spend will support its fast-growing Fresh business.
Impatient investors who are unwilling to wait for customer loyalty to drive underlying growth will miss the stock’s rise from here.
Opportunity
The Korean e-commerce market has an annual addressable market of $200 billion by 2024. It will rank Korea as the third-largest online market only after the U.S. and China. China’s economic slowdown, led by a crackdown on technology firms and the de-leveraging of real estate, may result in Korea narrowing the gap.
Management looked beyond the Covid lockdown in Q3 that slowed growth. It continued to expand its capacity. Demand is high and requires the company to increase its infrastructure footprint. CEO Bom Kim said, “we’ve now added as much square footage of infrastructure since the beginning of 2020, as we did in every year prior to 2020 combined.”
Novice investors who looked only at the headline loss will miss the details in Coupang’s aggressive investments. For example, advertising revenue almost tripled from last year. It will add significantly to margins in future quarters.
Catalysts
Coupang Eats is a new initiative that will add momentum to the business. The food service benefits from strong customer adoption and retention. Investors should expect low customer acquisition costs will drive margins higher. The performance is already giving Coupang management the confidence investing to scale Eats.
Coupang plans to develop Fresh and Eats for long-term growth. Cash flow from operations will eventually exceed costs. This will reverse the adjusted EBITDA loss the company reported in Q3. Still, Coupang does not need the cash. It ended the quarter with around $4 billion in cash on its balance sheet.
Investors cannot time when initiatives in Eats and Fresh pay off. Chances are very high that in the next few quarters, the businesses will reach an inflection point of profitability.
Risks
Higher Covid cases would hurt Coupang’s revenue in the near term. It invested in staff and other expenses to mitigate lockdown risks.
Coupang has many projects promoting automation and process improvement. It delayed some of those projects. Investors will not see the results of those initiatives for several quarters. Coupang may report further delays, which could hurt the stock price.
Korea is largely Coupang’s addressable market. It is testing Japan and Taiwan markets. Conversely, investors could buy MercadoLibre (NASDAQ:MELI), which trades at a similar market capitalization. MELI stock also trades at high multiples. This would suggest that CPNG shares deserve similarly high valuations.
On Wall Street, the lowest price target is $28, according to Tipranks. Analysts will raise their rating on Coupang after the company posts smaller losses. By the time that happens, shares may already have rallied. Investors are better off starting a position in the stock at current levels. It is better than timing the entry point in a fast-growing firm.
Your Takeaway
Coupang is an out-of-favor stock. It does not get the same attention that US-based firms in the e-commerce space have. Investors should use that to their advantage. By building a position in the stock from here, the reward comes when Coupang’s management delivers on profit growth.
Markets may ignore Coupang stock for longer than previously thought. Shares will underperform. So, the investment is best suited for the patient buy and hold investor.
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.
