While the tech-heavy Nasdaq Index (NDX) surged 43% in 2023, many of these gains were driven by mega-cap stocks like Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META), and Apple (NASDAQ:AAPL). However, e-commerce stocks such as Coupang (NYSE:CPNG) trailed the broader markets. CPNG stock rose “just” 10% in 2023 and is 77% below its all-time high. While Coupang has underperformed since its 2021 IPO, I’m bullish on the stock for 2024 due to its expanding addressable market, strong revenue growth, and improving profit margin.
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An Overview of Coupang
Coupang is a South Korea-based e-commerce company. It has two primary business segments, including Product Commerce and Developing Offerings. Coupang sells various products and services across categories such as home goods, apparel, beauty, home goods, electronics, and more.
Additionally, Coupang offers Rocket Fresh, a grocery delivery platform, while Coupang Eats provides restaurant ordering and delivery services. The tech company also has Coupang Play, an online content streaming platform.
In order to boost customer engagement rates, Coupang has invested heavily in infrastructure and technology. It has built more than 100 fulfillment centers spanning roughly 50 million square feet, housing millions of products. Coupang emphasized that 70% of the Korean population lives within seven miles of a Coupang logistics center.
The company now aims to leverage its capabilities in artificial intelligence and machine learning to better predict consumer demand, enabling it to deploy products across its network of fulfillment centers. Coupang is also banking on technology to dynamically route hundreds of millions of orders efficiently.
How Were Coupang’s Recent Q3 Results?
Despite a challenging macro environment in 2023, Coupang increased its net revenues by 21% year-over-year to $6.2 billion in Q3. Further, the number of active customers on the Coupang platform grew by 14% to 20.4 million in the quarter. Comparatively, its gross profits rose by 27% year-over-year to $1.6 billion, indicating a margin of 25.3%.
Coupang ended the September quarter with an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $239 million, indicating a margin of 3.9%. In the last 12 months, adjusted EBITDA stood at $991 million, as it improved margins by 490 basis points.
Unlike several other e-commerce tech stocks, Coupang has been reporting positive cash flows consistently. In the last four quarters, Coupang’s operating cash flow stood at $2.6 billion, while free cash flow was $1.9 billion, indicating that the company spent $700 million in capital expenditures.
In the year-ago period, Coupang reported an operating cash outflow of $200 million, while its free cash outflow was much higher at $1 billion.
Coupang stated that its revenue and active customer growth accelerated for the third consecutive quarter in Q3, as its Developing Offerings generated 40% revenue growth in the quarter. Moreover, Coupang expanded Rocket Delivery in Taiwan and helped around 12,000 small businesses to export products to new markets in the last 12 months.
During the company’s recent earnings call, CEO Gaurav Anand stated, “We’ve expanded profitability while making investments in Developing Offerings, and we expect our consolidated margin to continue its march upwards on an annual basis.”
Coupang Acquires Farfetch
Last month, Coupang announced the acquisition of Farfetch Holdings, an online luxury company. The acquisition positions Coupang as a leader in the global personal luxury goods segment valued at $400 billion.
Coupang believes its operational excellence and innovative logistics network, combined with Farfetch’s widening ecosystem in the luxury market, should help it drive experiences for customers and brands globally.
Alternatively, the acquisition of Farfetch might strain Coupang’s balance sheet. In the first six months of 2023, Farfetch lost over $440 million while sales stood at $1.1 billion.
The acquisition agreement will provide Farfetch with $500 million of capital, shoring up the company’s liquidity in the near term.
Is Coupang Stock Undervalued?
Analysts tracking Coupang stock expect its sales to rise by 17% to $24.08 billion for 2023 and by 13.3% to $27.27 billion for full-year 2024. Comparatively, it is forecast to end 2024 with adjusted earnings of $0.44 per share compared to adjusted earnings per share of $0.25 expected for 2023.
So, priced at 1.2x forward sales and 37.1x 2024 earnings, CPNG stock is not too expensive, given its growth estimates.
However, there is a good chance that the acquisition of Farfetch might result in lower profit margins for the e-commerce player. Nonetheless, Coupang ended Q3 with $4.9 billion in cash and $2.8 billion in debt, providing it with enough liquidity to navigate the current macro environment and acquire Farfetch.
Is CPNG Stock a Buy, According to Analysts?
Out of the six analysts covering CPNG stock, two recommend a Buy, three recommend a Hold, and one recommends a Sell. The average CPNG stock price target is $19.52, which is 24.1% above the current price.
The Takeaway
Coupang is among the largest e-commerce companies in South Korea, and it will gain access to several other markets once the acquisition of Farfetch is closed. I expect the stock to gain momentum in the next 12 months, especially if it can successfully integrate Farfetch and benefit from operational synergies as well as stable profit margins.
