Coupang, Inc. (CPNG) is an e-commerce giant, mostly in South Korea. Although it’s often referred to as the “Amazon of South Korea,” Coupang lacks a profit engine to generate significant cash flow and finance expansion, as Amazon Web Services (AWS) does for Amazon (AMZN).
Given the limited size of the Korean e-commerce market, the lack of a cash cow like AWS is cause for concern and I remain neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
Business Overview
At its core, Coupang remains an online retailer, with first-party (B2C) sales accounting for roughly 90% of the company’s revenue through the first half of 2021. The company boasts an impressive logistics network – 70% of Koreans live within 7 miles of a Coupang distribution center – allowing it to fulfill 99.6% of orders within a single day.
This incredible delivery capacity – coupled with a wide variety of products, low prices, and a frictionless customer experience, has made Coupang tremendously popular in Korea. It is now the largest B2C e-commerce company in the country.
The Power of AWS
Although Amazon has become nearly synonymous with e-commerce, it’s the company’s cloud computing segment, Amazon Web Services, that actually accounts for the majority of the juggernaut’s profits.
In Q3, operating margins on its North American and international e-commerce operations – which include both B2C sales and third-party (C2C) seller services – sat at roughly 3% and -1% respectively (based on TTM sales).
In the same quarter, AWS’s operating margin was approximately 28%. Indeed, despite only accounting for 12% of revenue in Q3, AWS generated 57% of total operating income.
Searching for a Cash Cow
As evidenced by the statistics above, AWS has been – and will continue to be – hugely important to Amazon’s overall success. Given that Coupang has less room to scale its low-margin e-commerce business – Korea is less than a sixth of the size of the United States – the company’s ability to diversify into new verticals may be even more important to its long-term success. To this end, Coupang has begun diversifying into several new industries.
Coupang Eats
At the moment, Coupang Eats, a food delivery service similar to Uber Eats, appears to be the company’s largest auxiliary segment. On the plus side, Korea boasts the third-largest food delivery market in the world after its sales surged 80% to reach $15.5 billion in 2020.
Further, Coupang Eats has rapidly gained market share since its launch in mid-2019 and is already the third-largest service in the country, with an estimated 4.22 million users as of April 2021.
While this growth has been impressive, it has largely been driven by the company’s “single-order delivery” policy – Eats drivers only pick up and deliver one order at a time – which has certainly dragged down margins.
Competition is also fierce for both customers and drivers, with Coupang and its competitors running months-long promotions and boosting pay to attract more drivers. Given the competitive pressure and the limited size of the market, it seems unlikely that Eats ever becomes a significant profit engine for Coupang, even if it does succeed in overtaking the current market leaders.
Other Verticals
Coupang’s prospects in other segments are far murkier. In April 2020, the company spun off its in-house digital payment service, CouPay, and stated that it plans “to become an integrated fintech platform beyond the simple payment service.”
Management has been vague about its specific plans in this industry, however, and the digital payments space is heavily saturated. The company also operates a tour package marketplace (Coupang Travel) and has indicated that it may begin offering third-party logistics (3PL) services.
Unfortunately, Coupang has failed to generate any substantial revenue through its Travel platform, and 3PL is a highly-competitive, low-margin industry.
Is the Low Valuation Justified?
After going public, CPNG finished up 41% on its first trading day. Since then, however, it’s been all downhill and the stock currently trades nearly 17% below its IPO price.
While the stock trades at a favorable valuation relative to other e-commerce companies – with a price/sales ratio under 2 based on 2022 estimates – from my perspective, the limited growth runway in its core market and the lack of profitable optionality justify this discount.
Wall Street’s Take
Despite these concerns, Wall Street remains bullish. Coupang sports a Moderate Buy consensus rating, based on one Buy and one Hold rating assigned in the past three months.
The average Coupang price target of $32 implies 9.6% upside potential.
Disclosure: At the time of publication, Tripp Stup did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.
