Coupang: The Risk/Reward Is Attractive – Again (NYSE:CPNG)

Thesis

With Coupang, Inc. (NYSE:CPNG) shares falling back to $15, I again think that the risk/ reward for investing in the South-Korea e-commerce giant is attractive – trading at an EV/Sales of approximately x1.25. Investors should consider that after having achieved the first profitable quarter, as measured by operating income, a major risk concern for Coupang shareholders, namely the financial loss of value over time, is removed.

On the backdrop for EPS upgrades through 2025, I raise my target price for CPNG stock to $25.57/share, as compared to $19.37/share prior. Buy.

For reference, Coupang stock is down approximately 47% YTD, as compared to a loss of 20% for the S&P 500 Index (SP500).

Finally Profitable – Strong Q3 2022

Coupang posted excellent results for the September quarter 2022, and surprised investors with the achievement of positive operating income, earlier than expected.

During the period from July to end of September, Coupang generated total group revenues of $5.1 billion, which compares to about $4.6 billion for the same period one year earlier (10% year-over-year growth). According to management commentary, FX effect caused a 17 percentage point headwind to revenue growth. Net revenue per active customer was $284, which reflects a year-over-year growth of about 3%.

Although Coupang’s Q3 revenue disappointed against analyst consensus estimates by about $113 million, the company surprised Wall Street with regards to profitability. I have previously estimated that Coupang would achieve profitability by early 2023, so I, too, am positively surprised.

On the backdrop of a gross margin expansion of about 800 basis points as compared to Q3 2021, Coupang’s operating profit pushed up to $77.4 million, compared to a loss of $315 million for the same period one year earlier. Q3 net-income grew to $91 million, or $0.05/share (analyst estimates were anchored on a loss of approximately $0.02/share).

Confident Management Commentary Going Into 2023

Although Coupang did not give any formal financial guidance for 2023 – this will be given in the beginning of the new year – management provided overall very confident commentary.

Bom Kim, founder and CEO of Coupang, said:

Our continued progress is a reflection of billions of dollars invested over the past seven years to build an unrivaled network that integrates technology, fulfillment and last-mile logistics

We will continue investing in process optimization and automation, including machine learning and robotics, to deliver even richer experiences and lower prices for our customers.

Similar commentary was given by Coupang’s CFO, Gaurav Anand:

… Much of the recent improvement has been the result of investments in technology, infrastructure, supply chain optimization, and process innovation. We are proud of our teams and the operational excellence that they continue to demonstrate while creating new moments of wow for our customers.

Kim also hinted that he is seeing the current macro economic headwinds more as an opportunity than a risk – with the expectation of gaining more market share from struggling and underfunded competitors.

In 2023, Coupang’s position in the market will be solidified through an online-market shakeup. A lot of startups are facing financial crises as they are having difficulties raising funds amid high interest rates.

Valuation Update: Raise TP To $25.57

Having achieved operating profitability earlier than expected, I upgrade my EPS expectations for Coupang through 2025: I now estimate that Coupang EPS in 2023 will likely expand to somewhere between $0.15 and $0.4. Moreover, I also raise my EPS expectations for 2024 and 2025, to $0.75 and 1.45, respectively.

I continue to anchor on a 4% terminal growth rate (one percentage point higher than estimated nominal global GDP growth), as well as on a 9% cost of equity.

Given the EPS upgrades as highlighted below, I now calculate a fair implied share price of $25.57, as compared to $19.37/share prior.

Below is also the updated sensitivity table.

Risks

As I see it, there has been no major risk-updated since I have last covered CPNG stock. Thus, I would like to highlight what I have written before:

First, a worsening macro-environment including inflation and supply-chain challenges could negatively impact Coupang’s customer base. If challenges turn out to be more severe and/or last longer than expected, the company’s financial outlook should be adjusted accordingly.

Second, much of Coupang’s share price volatility is currently driven by investor sentiment towards risk and growth assets. Thus, investors should expect price volatility even though Coupang’s business outlook remains unchanged.

Third, inflation and rising-real yields could add a significant headwinds to Coupang’s stock price, as the higher discount rates affect the net present value of long-dated cash flows.

Finally, the thesis in this article [see here] builds on the assumption that Coupang can enjoy significant growth in South Korea and claim a >60% market share. This, however, could be challenged as the country’s regulators might interfere with Coupang’s growth in order to preserve healthy competition.

Conclusion

Coupang, Inc. remains a quality company, with an attractive business opportunity and growth potential in South Korea. Moreover, I continue to believe that Coupang is poised to eventually become the country’s dominating e-commerce player, likely to increase market share from 20% as of 2022 to more than 60% by 2030.

On the backdrop of EPS upgrades through 2025, I raise my target price for Coupang, Inc. stock to $25.57/share, as compared to $19.37/share prior. Buy.