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Introduction
Coupang (NYSE:CPNG) is an e-commerce platform firm primarily working in South Korea. I began protecting Coupang in April of 2021. Throughout this time, I used to be bearish on the corporate. I believed the valuation of the corporate was too excessive contemplating the aggressive panorama within the South Korean e-commerce market regardless of the corporate’s sturdy top-line development. Then, in January of 2022, after a large sell-off, I upgraded my ranking on the corporate to a maintain. My reasoning for the maintain ranking was a large decline in inventory value lowering the dangers coming from a premium valuation whereas casting doubts on the corporate’s potential to be worthwhile within the aggressive e-commerce business in South Korea. In the present day, I’m upgrading my maintain ranking to a purchase. Not solely has the inventory value declined additional bringing the corporate to a good worth, however the firm has excelled in its operations rising because the clear chief within the South Korean e-commerce and even retail business. Additional, the corporate has efficiently reported earnings throughout a slowdown within the South Korean economic system in 2023 leading to an elevated expectation because the South Korean economic system is anticipated to develop at a quicker tempo in 2024. Due to this fact, contemplating Coupang’s enhancements in valuation, modifications in macroeconomic situations, and profitability, I consider Coupang is a purchase. The corporate will doubtless be one of many top-performing shares and firms in 2024.
Macroeconomic Situations
Not like in 2023, a pivot within the macroeconomic atmosphere is anticipated to supply a tailwind for Coupang in 2024. Coupang’s major operations are in South Korea, and in 2023, the corporate was working in a macroeconomic atmosphere that acted as a headwind to the corporate’s operations. According to the OECD, Group for Financial Cooperation and Growth, South Korean GDP, in 2023, is anticipated to develop by 1.5%, which is a big decline from the 2022 GDP development of two.6%. Nonetheless, in 2024, South Korea’s GDP development is anticipated to rebound to 2.1%. This view of a GDP growth rebound can be shared by different organizations together with Reuters.
Regardless of a reasonably difficult macroeconomic atmosphere in 2023, Coupang carried out nicely. The corporate’s income in 2023Q3 grew 21% year-over-year. Thus, on condition that it’s broadly anticipated for Korean financial development to rebound in 2024 in comparison with 2023, I consider it’s cheap to argue that the macroeconomic situations will swap from making a headwind to offering a tailwind for Coupang.
Operational Excellence
Coupang has carried out exceptionally nicely lately each completely and comparatively. The corporate reported sturdy high and bottom-line development in earnings supported by steady development in members. Additional, Coupang was in a position to come out because the dominant participant within the aggressive South Korean e-commerce business in latest months cementing the corporate’s place as a key participant.
The 2023 Q3 earnings report displays Coupang’s distinctive efficiency as the corporate reported a 21% enhance in year-over-year income to $6.2 billion. By way of profitability, the corporate was in a position to develop its margins. Gross revenue elevated 27% year-over-year because the gross revenue margin elevated by 113 foundation factors, and free money movement, within the trailing twelve months, was $1.9 billion, which is a rise of $2.9 billion as Coupang solely not too long ago began reporting earnings. Lastly, energetic prospects reached 20.4 million, growing 14% year-over-year.
Wanting on the high and bottom-line development permits us to see that Coupang is performing nicely, however how is the corporate doing in comparison with its business friends? Whereas these numbers are spectacular, if opponents are reporting higher development and margins, it may imply that Coupang is comparatively underperforming.
Fortuitously, Coupang is performing nicely relative to its opponents. In truth, in latest months, Coupang has cemented its place because the clear market chief within the Korean e-commerce market. Coupang has two main opponents in Korea: SSG Group and Naver Company.
(I defined what SSG Group and Naver Company are intimately in my earlier article, so please refer again to this article for extra element. I’ll solely briefly clarify these firms and the aggressive panorama on this article.)
Naver is the proprietor of the most important search engine in Korea competing with Google (GOOG) (GOOGL), and this firm partnered with CJ Logistics, the most important logistics firm in Korea, to sort out the e-commerce market. The thought was that Naver would leverage its search dominance to create an open market e-commerce platform whereas CJ Logistics takes care of the bodily motion of the products. Then, there’s SSG Group, a conglomerate that owns E-Mart, G-Market, eBay Korea, and different retail property together with one of many largest division retailer chains, a baseball staff, and so on. SSG Group needed to leverage its bodily presence and not too long ago acquired G-Market to problem Coupang.
Quickly after the pandemic, I believed these opponents would hinder the expansion of Coupang as they’re family names in Korea. It’s practically unattainable to keep away from utilizing providers from these conglomerates as their affect on Korean society and economic system is monumental. Nonetheless, at this time, it’s evident that Coupang is profitable within the e-commerce competitors by a large margin.
First, SSG Group is at the moment struggling. SSG Group holds the Walmart (WMT) of Korea, E-Mart they usually acquired an e-commerce platform G-Market to leverage these property to win the e-commerce race. In the course of the pandemic, it was broadly believed that SSG Group can be one of many dominant gamers out there together with Coupang and Naver. Nonetheless, the time has confirmed that this was not the case. 2023 year-to-date, G-Market’s month-to-month energetic customers declined 14% whereas Coupang, as acknowledged earlier, reported sturdy development in energetic customers. Additional, SSG Group as a complete reported a 13% decline in web revenue and income year-over-year. This might imply that the conglomerate might not have the ability to allocate sufficient sources within the e-commerce portion of the enterprise to remain aggressive because the conglomerate’s predominant retail enterprise is in peril.
(The supply hyperlink supplied is in Korean, please let your browser translate the web site to your most well-liked language)
Naver is in a greater place than SSG Group; nonetheless, relative to Coupang’s latest efficiency, Naver can be lagging behind Coupang. Excluding latest acquisitions, Naver’s commerce enterprise grew 14.7% year-over-year in comparison with Coupang’s 21%. For the previous few quarters, the discrepancy in these two firms’ development charges was in Coupang’s favor.
Total, Coupang’s efficiency has been spectacular each completely and comparatively. The corporate’s high and backside strains grew quickly whereas its key opponents have been struggling to discover a footing or rising at a slower tempo than Coupang. Due to this fact, it’s cheap to argue that the corporate’s development will proceed in 2024. Competitors is consolidating because the third largest e-commerce participant is struggling whereas Coupang is popping out to be the chief within the business with quicker development than the second largest opponents.
Financials and Valuation
Along with Coupang’s sturdy operations and potential optimistic macroeconomic tailwinds, Coupang boasts favorable valuation multiples and stability sheet well being.
Coupang’s balance sheet is extraordinarily wholesome. The corporate has $4.86 billion in money or money equivalents and $11.56 billion in complete property. However, Coupang’s long-term debt stands at solely about $527.7 billion and a complete legal responsibility of about $8.63 billion bringing the entire legal responsibility to asset ratio of about 74.65%. Additional, on account of a powerful money place with little debt, the corporate throughout 2023Q3 earnings, reported a web curiosity revenue of $50 million. As such, Coupang has an especially wholesome stability sheet that would maintain the corporate’s operations and sure enable the corporate to face up to some market turbulences.
By way of valuation, Coupang has a 2024 ahead price-to-earnings ratio of about 34.64. Compared, Amazon, additionally working an e-commerce enterprise, has a 2024 ahead price-to-earnings ratio of about 35.54. Amazon certainly has an AWS enterprise, so the direct comparability between the 2 firms will not be essentially the most related. Nonetheless, even when contemplating this reality, Coupang is anticipated to develop its backside line by about 78% year-over-year in comparison with Amazon’s 29%. Due to this fact, contemplating the above elements, valuation multiples, and bottom-line development expectations, I consider there can be extra upside potential to Coupang’s valuation.
Threat to Thesis
I consider Coupang can be having fun with a tailwind from the altering macroeconomic situation and the aggressive panorama together with the corporate’s continuous pattern of bettering each the highest and backside strains. Nonetheless, within the brief to medium time period, the corporate’s profitability could possibly be challenged by the build-out of the Taiwan operations. In the course of the 2023 Q3 earnings call, the administration mentioned that the event choices reported an adjusted EBITDA lack of $160 million for the quarter. The administration staff additionally says that the corporate “anticipate[s] the losses for Developing Offerings in the fourth quarter [to] be lower than the level of losses we saw this quarter;” nonetheless, on condition that the infrastructure build-out for an e-commerce enterprise are usually extraordinarily capital intensive as seen with Coupang earlier in Korea, critical growth into Taiwan is anticipated to be pricey for the foreseeable future.
Abstract
Coupang, in my view, is a purchase. The macroeconomic situations are anticipated to vary from creating headwinds to tailwinds in 2024. And, together with this pattern, the corporate has efficiently reached profitability whereas cementing its market management place.
Editor’s Word: This text was submitted as a part of Searching for Alpha’s Top 2024 Long/Short Pick investment competitors, which runs by December 31. With money prizes, this competitors — open to all contributors — is one you don’t wish to miss. If you’re concerned with changing into a contributor and participating within the competitors, click here to search out out extra and submit your article at this time!
