Coupang Inc (CPNG) Stock Report
As requested by our member, John - posting the full analysis here.
Overview
Coupang Inc. (CPNG) is the largest online marketplace in South Korea. The company states that 70% of the Korean population lives within 7 miles of a Coupang logistics center. The company can be thought of as the Amazon of South Korea.
Key Catalysts
Coupang announced that it has completed the acquisition of the assets of global online luxury company Farfetch Holdings plc (previously FTCH). It has also provided access to 500M in capital, which would allow Farfetch to continue operations. The acquisition will add a significant global online audience to Coupang's operations.
Other than that, the company is exposed to the economic macro forces prevalent in its geographic region - South Korea's population growth and GDP Growth.
South Korea is the country with the world's lowest birth rate. Specifically, South Korea’s total fertility rate (the number of births from a woman in her lifetime) is now expected to drop from 0.78 in 2022 to 0.65 in 2025. South Korea’s total population is expected to drop from 51.75 million in 2024 to 36.22 million, a level not seen since 1977. - Source: Statistics Korea
Through this lens, it makes 100% sense for management to seek expansion beyond South Korea's borders.
South Korea's GDP growth is projected at 2.1% in 2024.
Notably, the company has not been able to turn a profit in the last 3 full-year periods, as operational expenses have constantly run above gross profit. This has changed since Q3 2022, with the company notching a string of 5 consecutive profitable quarters. In this period, the company has recorded a razor thin 2.9% EBITDA margin (see operating model attached). By comparison, AMZN's EBITDA margin for the same period was 10.3%.
Revenue Growth
Our system projects an average revenue growth of about 10% at the midpoint for the next 5 years. This is a reasonable assumption.
Gross Profit Margin
Our systems project an improvement in Gross Margins from 25% currently to 27% in subsequent years. This expansion in margins is key to the company's success and valuation. Current trends support this growth.
Operating Expenses
We have kept operating expenses flat, at 24% of sales.
Shares Outstanding
We have modeled no change in shares outstanding.
Valuation
We have assigned a 37 EV / EBITDA multiple, accounting for the improvement in Gross Margins. The figure appears large, but it translates to a 1.32 EV / Sales multiple, which is reasonable.
Ranking
Our system ranks CPNG as a mid-tier investment:
# 807 / 1500 in Millennium Alpha
# 159 / 228 in Trade & Services Economic Sector
# 4 / 7 in its Industry Group
# 4 / 16 in its Peer Group
Fundamentals mapped to Technical Chart
Our Price Target for this stock comes down to $20.7, with a 9% CAGR slope. However, this puts the stock in "stop-loss" territory, as the technicals are not currently confirming these fundamental assumptions. If CPNG does not manage to hit its revenue growth targets or its gross margin targets, downside exists to $10, both fundamentally and technically.
An improving technical picture (trading above $16.2) would put this stock in the "investible" zone. Otherwise, ahead of its February 27 earnings, this becomes a risky play. See more metrics of interest on the attached chart.
Conclusion & Rating
We would rate CPNG as a HOLD currently. The stock has an attractive technical setup, apparently trading at a discount to fair value, but it faces multiple structural headwinds. Additionally, this is a stock that has not rallied with the market, in the context of global optimism and positive risk appetite. In an economic downturn scenario, this stock can become a train wreck. Its EBITDA margin of just 2.5% makes it very vulnerable to any kind of shock or operational issue. If they can't meaningfully increase margins, there is no path to sustained profitability.
If we were forced to include this company in our portfolio, we would do so using some sort of options strategy so as to limit the downside risk and capture the upside for about 3 more quarters, until fundamentals stabilize.