Is Coupang Stock A Good Investment For Long-Term Investors?

Summary

• Coupang is growing its clout in the South Korean e-commerce market as it scales. EBIT profitability might be just three years away.
• It also operates a considerable first-party marketplace model. Coupang is also estimated to grow faster than the market.
• We discuss whether Coupang stock is a good long-term investment.
• This idea was discussed in more depth with members of my private investing community, Ultimate Growth Investing. Learn More »

ipopba/iStock via Getty Images

Investment Thesis

Coupang, Inc. (NYSE:CPNG) is one of the leading e-commerce companies in South Korea. We have covered the company's business model quite extensively in our previous articles. We welcome you to read them for a better understanding of our thesis on Coupang.

• Is Coupang Stock A Buy Now? Buy While It's Still Weak
• Coupang Is Still The One To Beat In South Korea

We discuss in this article whether its stock is a good long-term investment.

CPNG Stock YTD Performance

CPNG stock YTD performance, from 11 March. Performance as of 29 October 21.

We will consider CPNG stock performance from 11 March onwards as it was listed on that day. Readers can quickly glean that the stock has been on a downward spin since it was listed. Investors who entered on 11 March are looking at a YTD loss of 38.6%. It's undoubtedly a highly disappointing performance even for the most optimistic investors. In contrast, its peers have performed much better than CPNG stock. For example, eBay (EBAY) stock has outperformed the rest in this comparison with a 37.5% YTD gain. In contrast, Amazon (AMZN) stock and Walmart (WMT) stock also comfortably lead CPNG stock with YTD gains of 9.2% and 11.4%, respectively.

Why Investors in Coupang Need to Be Patient

As a recent IPO stock, Coupang's investor base is still filled with PE/VC firms that collectively own about 42.2% of the company. Most notably is SoftBank's (OTCPK:SFTBY) 29.45% stake, which makes it Coupang's largest shareholder.

Coupang's institutional investors only accounted for 21.5% of its ownership. Therefore, these important investors still account for a relatively small percentage of its ownership. Moreover, these investors have a much longer-term horizon on their stocks compared to hedge funds or PE firms. Therefore, investors may have to continue dealing with higher volatility in the stock without substantial institutional sponsorship. On the other hand, PE firms or hedge funds may be more speculative in their perspective. In addition, some long/short hedge funds might also capitalize on CPNG's weak institutional base and further drive volatility in the stock.

For instance, SoftBank recently sold 57M of Coupang shares at $29.69 in September. CPNG stock suffered huge volatility swings during that period as some investors took the cue that SoftBank was "exiting" its investments. However, these investors didn't consider that SoftBank still owns 511M shares. Hence, the sale represented just about 10% of its total ownership previously. SoftBank remains a crucial cornerstone investor in Coupang. It's merely taking the opportunity to cash in on an investment that has returned it more than "tenfold by the end of March [2021]."

Moreover, Baillie Gifford & Co also added to its CPNG positions in Q3. Baillie Gifford is an asset manager with an AUM worth over $486.8B as of 30 June 21. Notably, the Scotland-based investment manager highlighted that "Baillie Gifford are long-term investors, not speculators. Our investment philosophy focuses on growth while our universe is global." The firm is a top-ten shareholder in Coupang and owns about 2.82% of the company.

We think it's vital for Coupang's retail investors to understand that SoftBank remains very much vested in Coupang's continued success. If more institutional investors join Baillie Gifford subsequently to support Coupang stock, the stock may be re-rated upwards subsequently. Notably, Bank of America (BAC) also recently listed Coupang as one of its top e-commerce picks.

Therefore, retail investors need to be patient with Coupang as it continues its rapid growth in the South Korean e-commerce market.

Coupang is Expected to Continue Growing Faster than the Market

Coupang est. revenue and EBIT mean consensus. Data source: S&P Capital IQ

Coupang est. EBIT margin. Data source: S&P Capital IQ

Readers can easily observe that Coupang is still expected to grow remarkably. Its revenue is estimated to grow at a CAGR of 23.2% through FY26. It's also likely to grow faster than the South Korean e-commerce market's CAGR of 19.1%. Coupang was the South Korean e-commerce market leader in 2020 with a 24.6% share. In addition, BAC estimates that its 2021 share would grow to 35%. Therefore, Coupang has further penetrated the market in the past year. Importantly, it's also expected to gain significant operating leverage as it scales.

Due to its razor-thin margins first-party (1P) marketplace business model, it has been posting EBIT losses. In addition, it posted a last-twelve-months (LTM) EBIT margin of -5.5%. Consensus estimates also point to an FY21 EBIT margin of -5.5%. Notwithstanding, Coupang is not far from achieving EBIT profitability.

We explained in our previous article that Coupang is expected to post gross merchandise value over $30B this year. It's even larger than MercadoLibre's (MELI) LTM GMV of $25.6B. Therefore, it's clear that CPNG operates a considerable e-commerce marketplace model.

Therefore, Coupang has sufficient scale to improve its operational efficiencies. Its -5.5% LTM EBIT had improved from -10.3% just two years ago. Coupang is estimated to post EBIT profitability by FY24. Therefore, investors are asked to exercise patience while Coupang scales.

Is Coupang a Buy Now?

Coupang is unlikely to be suitable for investors who don't have a long-term perspective. Without strong institutional sponsorship, the stock will likely continue to exhibit tremendous volatility in the short to medium term. However, we believe that as Coupang scales, it will continue to gain operating leverage. Therefore, its improving profitability profile may likely appeal to more institutional investors to add Coupang into their portfolios. After all, Coupang is an emerging leader in the sizeable South Korean e-commerce market that's still expected to grow remarkably fast.

CPNG stock EV/NTM Revenue valuation.

CPNG stock Vs. peers EV/Fwd Revenue valuation trend. Data source: S&P Capital IQ

CPNG stock is currently trading at an EV/NTM Revenue of 2.2x. Coupang is still expected to scale rapidly and achieve EBIT profitability by FY24. At the current price level, we believe CPNG stock is undervalued.

However, care must be taken when investors wish to make peers comparison. As Coupang mainly operates a 1P business model, they should only consider companies that mainly operate similar 1P models. If they make comparisons with third-party (3P) marketplaces, they may get "erroneous" valuation comparisons. 3P marketplaces will almost always come with much higher revenue multiples.

Hence, if we compare CPNG stock with Walmart stock or JD.com (JD) stock, CPNG stock might not look that cheap. JD is estimated to grow its revenue by 21.1% over the next five years. On the other hand, WMT is only expected to increase its revenue by a CAGR of 2.7% through FY25. Therefore, we would consider comparing against JD's valuation for a more equitable analysis. In this case, JD might seem to be a better buy than CPNG. Nonetheless, CPNG is not subjected to the regulatory headwinds that have battered Chinese stocks. Therefore, investors should also accord consideration to such regulatory challenges.

Given Coupang's strengthening leadership and its impending profitability as it scales, we think long-term investors will benefit from holding CPNG stock in their portfolio. Therefore, we reiterate our Buy rating on CPNG stock.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CPNG, AMZN, JD, MELI either through stock ownership, options, or other derivatives. 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.