Coupang: Scalability Is a Concern

Coupang (CPNG) is an e-commerce company that operates mainly in South Korea. The company sells apparel, electronics, footwear, food, furniture, and other products. It separates itself from the competition with next-day delivery services on 95% of items.

Since going public early in 2021, the stock has dropped over 45%, including another 8% in the last 30 days.

I am neutral on CPNG stock. (See Analysts’ Top Stocks on TipRanks)

Earnings Disappoint Despite Massive Growth

Coupang is growing revenues at a rapid clip. The company posted $4.6 billion in revenue in Q3 2021. This is 44% over the same quarter in the prior year. However, it missed estimates by $200 million. In Q1 and Q2 2021, the company grew revenues 70% and 65%, respectively, over the same periods in 2020.

Coupang has high costs of goods sold due to the nature of the retail business. During times of rising prices, it is important to look at gross profit and revenue when judging growth. This way, it can be seen whether growth will translate to the bottom line or whether it is simply the result of higher prices being paid to suppliers.

Q3 gross profit of $755 million was 62% above the same period in 2020. It is an encouraging sign that gross profit grew at a faster clip than total revenue. The company is also growing its customer base; it reported a 20% year-over-year increase in active customers.

Coupang’s growth is clearly prolific. The issue is that there is little indication that this will translate to profits in the future. Coupang is often called the “Amazon of South Korea,” however, Amazon (AMZN) has something that Coupang does not have; Amazon Web Services (AWS).

AWS, Amazon’s cloud services division, provides much of its profits despite providing just a small portion of its revenues. This is because the cloud computing space has attractive margins that the e-commerce business does not provide.

Indeed, Coupang lost more money in Q3 2021 than in Q3 2020, and by a large margin. Operating profits were down 46% from a $216 million loss in Q3 2020 to a $315 million loss in Q3 2021. Net income was also down significantly. At some point, the revenue growth must begin to translate into narrowing losses to indicate scalability.

Expansion Will Be Key

Coupang has begun to expand beyond the limited, although fertile, market of South Korea. The company seeks to become a force in Malaysia and Singapore with its sights set on the larger prize of Japan.

Coupang, as it is backed by SoftBank, has inroads into the Japanese market. Japan’s GDP was over $5 trillion in 2020, while South Korea’s was just $1.6 trillion. Per capita, the Japanese economy produced over $40,000 compared to South Korea at $31,600. Clearly, the Japanese market will be a key to Coupang’s future viability as a profitable enterprise.

Wall Street’s Take

Wall Street analysts are neutral on CPNG stock, with a Hold consensus rating. This is based on just one Buy rating and three Hold ratings assigned in the past three months. There are no sell ratings.

The average Coupang price target is $34.50, which implies 29.4% upside potential.

Conclusion on Coupang

Coupang stock has been in a persistent downtrend since its IPO. The company is in need of a catalyst to break out of this cycle and make gains for shareholders.

Unfortunately, it has missed estimates in Q3 2021. Growth alone has not been enough to impress investors as losses continue to widen each quarter. Successful expansion into the Japanese market will be one key to future success.

However, this market features fierce competition. At this time, analysts are cautious on Coupang stock, and investors should be as well.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.