CPNG

Coupang, Inc.

15.04
USD
17.96%
15.04
USD
17.96%
8.98 46.00
52 weeks
52 weeks

Mkt Cap 23.78B

Shares Out 1.58B

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Coupang: Q1 Results Better Than Expected

Summary Coupang's shares soar as the results came out better than expected after the stock has been crushed by more than 75% from its former highs. Coupang's results require interpretation as it's not immediately obvious why the business is now turning around. Coupang's core business line, its Product Commerce segment, turned EBITDA profitable. Meanwhile, its Growth Initiatives continue to rapidly grow in scale, although for now, still incurring losses. The business has been priced for "death", despite being on a run rate of $30 billion in revenues by Q4 2022. As always, happy to discuss my thesis further in the comments section. Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Learn More » Investment Thesis Coupang (NYSE:CPNG) saw its share price soar after the stock has been crushed by more than 75% from its former highs. Furthermore, for the untrained eye, it's not immediately obvious why investors should get excited about the name. However, as we dig in, you'll be pleasantly surprised to see, not only the progress the company has made in Q1 but the potential that lies ahead. In the interest of full disclosure, I've followed this company for a while and turned bullish on this name last November. And this is the performance of the stock: Nothing less than a seriously bad investment call on my part. Similarly, there's no reason to expect that my bullish call today would be any different. On the other hand, I follow a lot of stocks, and as I look around, I don't see a lot of optimism left in the market. I'm told that it's a good time to be greedy when others are fearful. So, here's why I'm bullish on CPNG. Revenue Growth Rates Slow Down Superficially, why would anyone want to get involved with this name? Let's be honest, the business's strongest revenue growth days are now firmly in the rearview mirror. And we shouldn't pretend this is not the case. What's more, as you can see above, Coupang is clearly just as likely to miss revenue estimates as they are to beat them. So with that in mind, why am I still bullish on this stock? Why Coupang? Why Now? Coupang is a Korean e-commerce player. Coupang aims to be the fastest e-commerce delivery service in Korea. Coupang believes that its investment in technology and infrastructure should allow the business to become meaningfully profitable as it gains scale. That's always been the thesis. What's more, on a constant currency, Coupang's revenues were up 32% y/y. Hence, it's clear that Coupang is doing something right. You don't get to compound at north of 20% y/y unless your platform resonates with customers. Remember, Korea's population is around 50 million. And during Q1, approximately 36% of its population was active on its platform. There are obviously children and other groups that couldn't order from Coupang even if they wanted to. Along these lines, consider the following trend increase y/y in active customers: Q1 2021: 21% Q2 2021: 26% Q3 2021: 20% Q4 2021: 21% Q1 2022: 13% Yes, the increase in active customers is down slightly, but Coupang has to be reaching market saturation by now. It will struggle to get much beyond 20 to 22 million of the population. This leads to the section that discusses its profitability profile. Profitability Profile Discussed Last year's Q1 saw negative 6% operating income margins. This time around Q1 saw operating margins of negative 4%, a 200 basis improvement y/y, but still clearly unprofitable. But if we unpick this slightly, this is what we see within that consolidated figure. You see a business where its main segment has turned EBITDA profitable (green box). This is an astounding feat. Often, if you are able to get involved in a business when it goes from being unprofitable to turning profitable, you get a very different type of shareholder involved. Because the story won't be about "yet another unprofitable eCommerce player", but about a business that profitably serves close to 40% of Korea. Furthermore, as you can see above, the reason why Coupang is unprofitable at the consolidated level is due to its Developing Offerings segment. This used to be called Growth Initiatives. This segment holds Coupang Eats (a food delivery service), Video, and International and Fintech initiatives. At constant current revenues, the business is growing in the mid-20s to high-20s, and priced at less than 1x this year's revenues. Compared with counterparts in the US, this is a serious discount. Even after stocks in the US have been crushed, there aren't any profitable eCommerce players growing at 20% CAGR priced at less than 1x sales. But there again, investors are notoriously risk-averse of investing in anything overseas, and even during bullish investment periods, the "overseas discount" is unlikely to close. So, in my humble opinion, this is not the right way to think about it. On the other side of the equation, we are talking about a business that's likely to reach approximately $30 billion in run rate by Q4. There are not so many businesses out there that are printing $30 billion per year in revenues and growing at a respectable rate. And given what we have discussed above, about customers clearly resonating with the platform, I am inclined to believe that Coupang will sustain at least mid-teens currency adjusted rates for a prolonged period of time. If we presume that after the stock has been beaten to a pulp over the last 12 months, going forward that its multiple to sales won't compress further, the simple growth in the intrinsic value of the business should see investors get a fair return from this point. It's easy not to like Coupang. It's a foreign business. As such, investors typically are unwilling to pay a "fair" premium for such assets. The business is clearly on the path to GAAP profitability, but not quite there yet. Consequently, investors will shy away and ask for a "show me" story, before rewarding the company with a more suitable multiple. With those considerations aside, let's be honest here, the stock has been utterly beaten to a pulp, and I believe unjustifiably so. Consequently, I'm turning slightly bullish on this name, while at the same time noting that there are much easier investments to be made right now. Stocks that are oozing free cash flows and priced at less than 10x free cash flows. So, with all that said, whatever you decide, good luck and happy investing. Find alpha in unloved names with enormous upside potential! Teva is one of my Top 5 Picks. If you're looking for a deep value investing approach that can help you generate between 50% and 200% potential upside in just a few years, then sign up for your two-week free trial with Deep Value Returns today! This article was written by THANK YOU for all the help that everyone has so kindly offered me, in how to think about businesses from different perspectives. DEEP VALUE RETURNS: The only Marketplace with real performance. There are no gimmicks and no place to hide because all I care about is delivering high performance against the S&P500. WARNING: Any stocks that you feel like buying after discussions with me are your responsibility. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

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