At first glance, Coupang’s (NASDAQ:CPNG) the underperformance after its IPO and its still high market capitalization will scare away cautious investors. The CPNG stock trades at high multiples as it is in the early stages of growth. Turnover is growing rapidly, but the business is still losing money.
Source: Michael Vi / Shutterstock.com
The South Korea-based e-commerce company is ready to spend more than it takes to fuel its future growth. Latest quarterly earnings report reaffirms further strengthening outlook in Asian region
Revenue Growth Will Increase CPNG Share
CPNG share posts growth in turnover 48% year-on-year. Its active customers are the engine of its business, growing at least 20% year-on-year for 15 consecutive quarters. The online giant is repeatedly growing faster than the country. South Korea’s GDP growth rate increased by 0.3% in the three months until September 2021. It needs to invest in logistics and manpower to prepare its platform for future growth.
During each of the last six quarters, the leader General Manager Bom Kim said that the profits at the retail level exceeded the operating costs. Coupang’s business is growing because its highest profit categories are growing the fastest. It spent $ 95 million in labor and operating costs to manage the increase in Covid-19 cases in Korea in the third quarter. He invested in infrastructure, which increased capacity. Due to the schedule, the CPNG inventory could not use this capacity. When the centers are ready, infrastructure spending will support its fast-growing Fresh business.
Eager investors who don’t want to wait for customer loyalty to drive underlying growth will miss the stock’s rise from here.
Korea’s e-commerce market has an annual addressable market of $ 200 billion by 2024. It will rank Korea as the third-largest online market after the United States and China. China’s economic slowdown, led by a crackdown on tech companies and real estate deleveraging, could allow Korea to close the gap.
Management looked past the third-quarter Covid lockdown which slowed growth. He continued to increase his capacity. Demand is high and requires the company to increase the footprint of its infrastructure. CEO Bom Kim said, “We have now added as many square meters of infrastructure since the start of 2020 as we have each year before 2020 combined.”
Newbie investors who have only looked at the overall loss will miss out on the details of Coupang’s aggressive investments. For example, ad revenue almost tripled from last year. This will significantly increase the margins over the next few quarters.
Coupang Eats is a new initiative that will give new impetus to the company. Foodservice enjoys strong customer adoption and retention. Investors should expect low customer acquisition costs to lead to higher margins. The performance already gives Coupang management the confidence to invest in making Eats evolve.
Coupang plans to develop Fresh and Eats for long term growth. Cash flow from operations will eventually exceed costs. This will reverse the adjusted EBITDA loss the company reported in the third quarter. Yet Coupang does not need the money. It ended the quarter with about $ 4 billion in cash on its balance sheet.
Investors cannot know when initiatives in Eats and Fresh are bearing fruit. There is a good chance that in the next few quarters, companies will reach an inflection point of profitability.
An increase in Covid cases would hurt Coupang’s income in the short term. It has invested in staff and other expenses to mitigate foreclosure risks.
Coupang has many projects promoting automation and process improvement. It delayed some of these projects. Investors will not see the results of these initiatives for several quarters. Coupang could signal further delays, which could hurt the course of action.
Korea is largely Coupang’s addressable market. It tests the markets of Japan and Taiwan. Conversely, investors could buy Free Mercado (NASDAQ:MELI), which trades at a similar market cap. MELI stock is also trading at high multiples. This would suggest that CPNG stocks deserve equally high valuations.
On Wall Street, the lowest target price is $ 28, according to Tipranks. Analysts will increase their rating on Coupang after the company posts smaller losses. By the time that happens, stocks might already have gone up. Investors would do better to start a position in the stock at current levels. It’s better than timing the entry point into a fast growing business.
Your takeaway meals
Coupang is a disgraced action. It doesn’t get the same attention as US-based companies in the ecommerce space. Investors should use this to their advantage. By building a position in the stock from here, the reward comes when Coupang’s management achieves profit growth.
Markets can ignore Coupang stocks for longer than previously thought. Equities will underperform. Thus, the investment is best suited for the patient buying and holding investor.
As of the publication date, Chris Lau does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.