Investors are crazy about initial public offerings (IPOs). There’s a lot of buzz around a young company making its debut on the stock market, with investors hoping for wild price swings and the famous IPO ‘pop’ to make a quick return.
But what if I told you that investing in IPOs is a bad idea? The data on IPO returns is not very encouraging, with an estimated two-thirds of them performing worse than the broad market three years after going public. If you buy a stock right after its IPO, the odds are stacked against you.
One company that suffered from the IPO curse is Coupang. The e-commerce giant in South Korea has dropped by 70% from all-time highs after going public in 2021. However, if you look at the underlying business fundamentals, Coupang is currently executing flawlessly. This was evident in its recent third-quarter earnings release.
Here’s why I believe Coupang is on track to become a massive growth stock and positioned to be one of the world’s next technology giants.
Coupang: A Big Deal in South Korea
For those who don’t live in South Korea, Coupang can be described simply as the Amazon of the country. It’s the leading e-commerce platform in the nation and is creating a wide range of products for both merchants and customers, similar to its North American counterpart. In fact, I might argue that it offers an even better value proposition than Amazon.
Customers of Coupang’s Rocket WOW membership get incredible value for just $4 a month. This includes free shipping on Coupang’s own delivery network, with most items eligible for same-day and next-day delivery. Customers who order before midnight can receive items, including fresh groceries, by 7 a.m. the next morning. That’s significantly faster than Amazon’s delivery service. In addition to its core e-commerce services, Coupang offers its Rocket WOW members discounts on its food delivery service, Coupang Eats, and access to its complimentary video streaming service, Coupang Play.
It’s no wonder then that Coupang reached 20.4 million active customers last quarter, a significant portion of the South Korean population of roughly 52 million. Customers spend a substantial amount of money on Coupang, with revenue per active customer growing 7% year over year in the quarter to $303. With a vertically integrated offering and customers who spend a lot of money, it’s not surprising to see merchants flocking to the Coupang marketplace. It’s where you can find the most South Korean e-commerce shoppers.
All of this has led to fantastic revenue growth at scale. Over the last 12 months, Coupang generated $22 billion in revenue, an 85% increase since early 2021. That’s $10 billion in new revenue, mainly from its South Korean customers, with a dominant position in an e-commerce market expected to reach hundreds of billions within 10 years. Given this backdrop, I would expect Coupang to continue growing its revenue at an impressive pace over the next decade. In the long run, I wouldn’t be surprised to see it become one of the few companies to reach $100 billion in revenue, putting it in the same league as current technology giants.
Expanding into Taiwan, Improving Profitability
There’s still a lot of potential for Coupang in South Korea, but it’s finally making moves outside of its home market. Its second major market is Taiwan, where the company introduced Rocket WOW delivery for customers and is investing heavily in the region. On the conference call, Coupang executives mentioned that the Taiwan market is growing faster than the South Korean one in the first year after launch, which is a fantastic sign. However, this has resulted in more losses in Coupang’s ‘Developing Offerings’ segment, which posted an adjusted profit loss of $161 million in Q3 compared to $44 million a year ago.
Despite these losses in new offerings, Coupang’s overall business is starting to become much more profitable, likely due to the scale and maturity of the South Korean segment. Gross profit margin improved to 25.3% in Q3, with net income of $91 million. Over the last 12 months, Coupang generated $1.9 billion in free cash flow, showing that it doesn’t need external financing to meet its growth capital expenditure needs.
Why the Stock is a Bargain
With a market cap of $27 billion, I believe Coupang shares are incredibly cheap. In the long run, Coupang believes it can achieve a 10% adjusted profit margin. Based on its trailing $22 billion in revenue, that would translate to $2.2 billion in profits, or an adjusted price-to-earnings ratio (P/E) of 12.3.
All signs indicate that Coupang will continue to grow its revenue at a rapid pace due to the remaining opportunities in South Korea and the emergence of Taiwan. If it doubles its revenue over the next five years to $44 billion, its adjusted P/E will have dropped to around 6. A growth stock like Coupang typically gets valued at a much higher P/E, which makes me think there is a lot of potential for Coupang shareholders over the next 10 years.
Don’t be put off by the recent price drop. Coupang presents a great opportunity for investors at these prices.
+ There are no comments
Add yours