Ahead of its quarterly report, South-Korean based firm Coupang (NYSE:CPNG) rallied from a $16.61 all-time low to almost $27 a share. As always, CPNG stock “sold on the news” after posting results on March 2, 2022.
And after clawing back more than 10% in yesterday’s regular trading, CPNG stock again sold off in after hours trading, giving back 7.3%.
What did investors not like about the results? The Coupang share price correlated positively to Nasdaq. Yet the technology index’s selling is not excusable for Coupang’s recent underperformance.
Post-Earnings CPNG Stock Slump Explained
In the fourth quarter, Coupang posted GAAP earnings per share loss of 23 cents. Revenue rose by 30.4% YoY to $4.55 billion. Chief Financial Officer Gaurav Anand highlighted the company’s focus on driving efficiencies and improving operating leverage. Those are naturally the next main objectives for a growth company. Coupang enjoyed two straight years of record growth and expansion.
For Q1, the company’s gross margin will rise by over 250 basis points. Furthermore, revenue will grow in the low-30% range in the period. Coupang is off to a strong start. Revenue will not grow enough to offset expenses.
Risk-averse investors are shunning growth companies that lose money. Readers should expect fearful investors to avoid Coupang; the company does not plan to post profits until 2024 at the earliest.
Eats Business Packs Potential
Coupang spent heavily to build Eats. It is already the fastest-growing service in Coupang’s history. In its second year of operations, it scaled the business to handle billions of dollars in orders. Coupang’s Chief Executive Officer believes that Eats is the leader in the fast delivery category.
Eats has further growth potential; 70% of Coupang’s active customers did not place a single order on the platform. To achieve profitability, Eats needs to resonate with customers. Customers need to see the value proposition from the app. When that happens, Coupang may leverage Eats as a stand-alone business.
Coupang’s EBITDA margin expansion is another opportunity. The company expects its e-commerce business to grow at 6% compounded annually in the next four years. Its revenue potential is around $300 billion by 2025. To get there, the company needs to grow faster than the competition.
Coupang is exploring markets outside of South Korea. It is testing its expansion plans in Taiwan and Japan.
Coupang Fresh is on the path to profitability by the fourth quarter of this year.
Tech Investors Have Alternatives
Technology investors should consider MercadoLibre (NASDAQ:MELI). Its brands include Mercado Pago, Mercado Crédito, Mercado Ads and Mercado Envíos. Sea Ltd. (NYSE:SE) runs Shopee. It also owns Garena, which developed a free battle royal game called Garena Free Fire.
Amazon (NASDAQ:AMZN) is a widely held e-commerce firm worth exploring. Recently, the company reported strong quarterly results. This included a windfall in capital gains from its ownership in electric vehicle firm Rivian (NASDAQ:RIVN).
To be sure, Coupang has the potential of becoming a global player. For 2022, it must control its rate of overseas expansion. For now, it must offer the best service at the most competitive price. That will limit its advertising efforts.
Still, after focusing on the customer experience, Coupang will grow its advertising. Already, it includes $200 million in advertising across fintech, international markets, and video channels.
Risks Ahead
Coupang’s aggressive investments will delay its path to profitability. For example, it is investing $200 million to fund growth. Last year, it invested a limited amount in new initiatives. Now that they proved their potential, Coupang will invest more to fuel growth.
Labor supply shortage worsened in the fourth quarter. This limited Coupang’s efforts to secure capacity. In addition, fixed cost leverage also hurts results. For example, Coupang Fresh doubled its logistics footprint last year. Fresh under-utilized its logistics due to understaffing at its new facilities.
Fortunately, Fresh will increase utilization in the quarters ahead. It will support the unit’s growth by advertising. In addition, it will expand the business by offering strong value for its merchants and customers on the platform.
Coupang’s management of Fresh facilities poses a small risk. They are more sophisticated than regular core facilities. The company needs a longer lead-time for achieving full utilization.
Fair Value of CPNG Stock
According to the quant scoring site Stock Rover, Coupang has a poor value and quality score. By comparison, Sea and MercadoLibre have better grades.
<em>Coupang scores are weak</em>
Coupang’s relatively weak scores suggest that conservative growth investors should not take a big position in the South Korean firm. Consider waiting for the recent selling pressure to ease. Nasdaq is showing signs of continued under-performance.
After a stellar 2020-2021 performance, speculative sectors no longer have a free lift from stimulus packages, low-interest rates, and governments printing money.
After the fiscal year 2022, Coupang’s capacity growth will increase its revenue. The e-commerce firm added 15 million square feet in 2021. It has a widening infrastructure lead compared to any of its competitors. It will keep investing in its future. Within third-party logistics (or 3PL), Coupang is developing its fulfillment capabilities.
Your Takeaway
Coupang is a fast-growing Asian e-commerce firm. It will keep posting quarterly losses as it invests in the business. As profit margins expand, the company will achieve break-even by 2024. This stock will fit growth investors who are willing to hold the stock for the next three years or longer.
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.
