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Jul 30, 2021
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At the time of writing this, it has a current market cap of ~65B USD. When it DPO'd on March 11th, the SoftBank backed company saw its share price jump from $35 to $63.5, an 80% single day increase. Since that time it has traded down, and stayed range-bound within a fairly narrow band. It currently trades for ~$38. Many analysts expect it to continue to perform at this level, with some opportunity to receive a valuation catalyst when they report earnings on August 11th. While this is certainly within the range of possible outcomes, there is also a convergence of factors that create a bullish thesis for the coming quarter and years to come. Some of these factors are outside of the sort of financials and fundamentals that drive a great deal of analysis for individual securities, providing some opportunity to establish strong positions before a change in analysts' ratings and further institutional investment. Most of my analysis is based on global macroeconomic trends, with an emphasis on externalities, and “stock stories,” and I believe there is an opportunity to get ahead of the curve, an opportunity that I will endeavor to make the case for here through a somewhat traditional SWOT analysis focusing on the company, the economic climate of Southeast Asia, and greater market trends that make it a potentially excellent value
A summary of CPNG itself:
$CPNG : NYSE Coupang is based in Seoul, SK, and is incorporated in Delaware. It was founded in 2010 by Bom Kim, a Harvard Business School drop-out. While Coupang in its current iteration looks nothing like the company he first founded, this isn't that uncommon for tech companies, and in this respect, it bears some resemblance to the company it draws frequent comparison to, Amazon. While this is the tech giant with which Coupang is most frequently associated and the one that it emulates in many respects, I think that there are arguments to be made that its future success is tied much more closely to Alibaba, AMD, Samsung, and Sea.
Like Amazon, Coupang has several different sectors. This includes their core business of e-commerce, where they are clearly taking some of the lessons of Amazon and applying them, offering their own brands of “essentials” on their platform, food delivery both in the form of groceries, where they once again have their own brands available for sale, and also from restaurants, small business solutions, payment processing, digital advertising, and through their recent acquisition of Singapore-based Hooq, subscription video-streaming services.
These customers also spent more with Coupang than they did the year before, +44% Y/Y. There are 52 million people in South Korea, so there is still a large portion of the market for them to tap into. Furthermore, they actually have a higher dollar retention rate than Amazon of 346% to 278%. This means that after somebody first uses the platform, they come back and spend more money in subsequent years. In the case of Coupang and Amazon, considerably more. While we don't have information about the dollar retention rate of Chinese customers with Alibaba, it is quite possible that these are the most valuable customers in the world. You want to talk about a moat? This is a moat.
Their goal is to make their customers unable to “imagine life before Coupang,” and they have built a very successful brand based on the rapidity of their delivery. 99.3% of their orders are fulfilled within 24 hours of the purchase. Even foreign goods are delivered within just 3 days. This is facilitated by their logistics network, which emulates the Amazon warehouse model, and the concentrated population density of the areas in which they operate. 70% percent of the South Korean population lives within just 7 miles of a Coupang fulfillment center. Returns are as simple as using their app to notify Coupang that you would like to return an item, setting it outside your door, and then within minutes, one of their 15,000 full-time drivers will have picked it up. It really is an incredible business model.
They already have created their own end-to-end logistics network of manufacturing, delivery, warehouses, and tech. What they haven't built, they have acquired. They currently have over 100 fulfillment centers in 30 cities in South Korea.
Furthermore, in 2020, Coupang is still operating cash-flow positive with $302M, despite their position as a rapidly growing company. Analysts are expecting revenue to rise another +61% this year to $19.4B. This correlates to +26.3% EPS this year.
The majority of Coupang's weaknesses can be described as traditional financials and the way in which they influence share price. Quite simply put, they won't be profitable especially soon, particularly as they continue to expand into new markets. There are lots of bullish indicators, even here. While net loss increased 180%, operating loss declined 36% on a revenue increase of 74%, $4.2B. It should also be noted that their 2020 gross income was also +92% of what they did in 2019. They are growing quickly, but they are paying for it, especially as their labor force jumped to 50,000 employees. The company plans to double this workforce over the next few years as they continue to grow. They aren't short on cash to fund this sort of expansionary effort however, as Coupang previously received $3B from SoftBank, and they certainly put it to work for them, yielding a $33B profit for their investor. They will be able to get infusions of cash just about any time they want.
EBITDA from 2020 provides the greatest reason for concern, as their operating, administrative, and general costs rose with the completion of their network, especially their fulfillment center capacity, moving from ($42M) to ($133M). This is fairly typical of a growth company, and I'm really curious to see what their EBITDA looks like on August 11th.
There are also, in fairness, some issues with these employees, and Coupang has been criticized for some of their labor practices. They also recently had a fire in their logistics warehouse.
Lastly, while I am unconcerned about competition in Korea, I would be remiss to fail to mention that they do not benefit from protectionist policies, and Amazon has recently tried to gain some market share in the country by taking a stake in 11Street. This is a non-issue for me, because they can't provide comparable services to those provided by Coupang unless they are willing to make a considerably larger investment and dedicate a decade to creating a similarly structured logistics system.
My enthusiasm for Coupang is based on the myriad diverse paths for future success, including possibly explosive growth over the next couple years. If you skipped the rest of the DD to get to this point, I wouldn't blame you.
One of the chief knocks against Coupang has been the size of the market in South Korea. There are two reasons why this is no longer the factor that it once was.
First, I am extremely bullish on the South Korean economy in general. Even if a market is small, as long as it has more assets in it, growth can be expected. A quick look at my post history will reveal that I am also bullish long on AMD, and I should probably be taking a good hard look at Samsung. This has a lot to do with the South Korean government's plan to invest $450B into becoming a global chip-manufacturing powerhouse. For a sense of scale, this is 9x the investment that the US recently pledged to manufacture this increasingly valuable commodity. While their GDP growth rate is already nearly 3x that of Japan, this savvy national strategy is only going to bring additional discretionary income to many Koreans, among whom consumer spending has not been a historical strength, in part due to the historical division of wealth inequality among South Koreans. This is no longer the case, and the South Korean middle class now comprises 53% of their population. Over the last year personal disposable income grew at an average rate of 3.55% and private consumption jumped 2.4% from Q1 to Q2.
Indeed, Korea's strong COVID-19 response helped their GDP contraction rank among the lowest in OECD countries. South Korean exports increased as a percentage of the global market share, primarily driven by about a 4% growth in semiconductors. They are already Asia's 4th largest economy, and while I don't see an imminent reshuffling of this order, having already moved to the 10th largest economy in the world, passing Russia and Brazil in the past year, they should pass Canada and Italy in the next two to three years.
In short, even if Coupang stayed concentrated in South Korea, strong economic policy has them well-positioned to be the beneficiaries of a growing economy, with steadily increasing discretionary income for a (busy) Korean middle class.
This leads me to my second point: they aren't staying in South Korea. They notably expanded their services to Japan and Taiwan this quarter, and just announced that they were about to begin their operations in Singapore, using this last expansion as a test platform to refine their broader expansion into the Southeast Asian market, with its population of 650 million. Coupang's next target for expansion appears to be Malaysia.
While some would see this aggressive expansion as a logical next step, there are two considerations that make it particularly valuable at this moment in time for Coupang: the first is that they are already past the period of significant investment in their own infrastructure and manufacturing capabilities, as exhibited by their financials. Secondly, Alibaba, the region's largest online marketplace is facing an existential crisis, which corresponds with market growth that fails to match e-commerce growth in the region. I won't go into that here. What I will say is that while I do not expect Coupang to ever operate in China, the world's second largest economy, the rest of Southeast Asia suddenly has a much larger contested market share.
There are two threats for us to consider when assessing CPNG as a growth stock. The first pertains to its business: there is a lot of competition in Southeast Asian e-commerce, with a range of players, but particularly the well-funded Shopee and Lazada. Lazada is a subsidiary of Alibaba, and there is way too much here for me to provide any sort of concrete analysis, so instead I'll focus on Shopee. There was a recent analysis on The Motley Fool, comparing Shopee's parent company Sea Ltd. (SE) to Coupang, in which the analyst suggested that SE was the better buy based on their gaming business. I reached the opposite conclusion (shocker) of the analyst at The Fool, in no small part because of Sea's connection to Tencent, particularly in regard to their gaming sector. Yes, Tencent holds 23% of SE's shares outstanding, but it is more the potential issue with the licenses of LoL and Arena of Valor, both developed by Tencent, and which Sea publishes in Asia, that has me slightly concerned. I'm not the only one either, as SE has seen a share price drop of about -3.49% over the course of this week. Mitigating this concern to some extent is that Sea's most important gaming title, Free Fire, the world's most downloaded game in 2020, is self-published.
It should be noted that given the growth of e-commerce in Southeast Asia that I am also very bullish long on SE, but the value differential of EPS (TTM) for Sea -3.59 and CPNG -3.99 does not justify the market's current concern regarding potential over valuation of CPNG as opposed to SE. SE currently trades at 18x this year's sales, compared to Coupang's 3x. SE currently has a market cap of 149.668B compared to Coupangs 65.092B. While I do expect Sea and Lazada to grow over the next several years, there is still a sizeable market for all three of these major players in the region.
This relates to the second threat: general market perception of CPNG. There are two stories being told here. One is the apparent share price, which again has failed to impress since it listed on the NYSE and the fairly widespread FUD coming through all the typical industry mouthpieces, and the other story is the massive institutional/ insider investment over the last 6 months, as well as some extremely curious options activity. Leaving the options out of it, because that is not how I am recommending playing this position, the reality of the 147,251,715 insider shares purchased over the last 6 months tells a different story than the one currently circulating among retail investors. 86.3% of the float is held by institutions. This isn't a retail darling, and the low volume corroborates this. This is a company slowly being acquired into consolidated positions by the likes of Greenoaks and Blackrock, while the business makes significant moves not reflected in the share price. The 1.34B shares float are going to make this a very difficult stock to move quickly, so one should temper expectations accordingly, and also avoid anything but the most conservative options plays in the short-term as a result.
Why enter now?
I'm expecting a beat on August 11th, but that isn't driving my urgency. What makes me want to expand my position in this company sooner rather than later is the revised thesis on Asian e-commerce due to Alibaba's profound issues, the ongoing COVID crisis, and the trends in NYSE investment. Retail investors have to conduct their own research and make their own decisions, algorithms on the other hand can make massive acquisitions as soon as they are given a ‘buy' signal, which in the case of CPNG could come sooner rather than later.
This is because of the anticipated shift over the next 10-18 months from ‘stable' large cap to ‘speculative' small/mid cap growth. We've been hearing a mixed story about the “rotation from growth to value” for a while now, and a cross section of ETFs can be used to make this case, that even with AAPL adding .5 T like it was nothing, value is up 16% YTD compared to growth, up 10% YTD, however, the “reopening” narrative seems to have shifted since mid-May, with speculative growth such as ROKU gaining 11% compared with cyclicals and banks, any of which provide ample evidence contrary to the popular rotational narrative. Alphabet notwithstanding, even with amazing ER beats, large cap tech is selling off their ATHs. While it is clear in recent days that some of these profits are flowing into fake internet money, I'm not here to tell you about that, instead to bring your attention to an opportunity in a company that actually makes things and provides services.
How to play it? LEAPS or shares only, both of which are extraordinarily cheap right now, and which probably won't be quite as inexpensive in the near future as Coupang's footprint in Asian e-commerce continues to expand, and investment in Asia further consolidates outside of China. I think you have about a quarter to establish a strong position before it becomes about 50% more costly to do so. This gives you some time to be patient with its growth, but not so long that I would hesitate to make the move. The real profits are made on surprise stories.
Disclosure: This is not financial advice. I have a small position in CPNG that I am looking to add significantly to. I am a degenerate and a moron. Do your own DD.