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Coupang IPO is on the Way

Isaiah Chapter 55, verses 8-9, "For my thoughts are not your thoughts, neither are your ways my ways, declares the Lord. As the heavens are higher than the earth, so are my ways higher than your ways and my thoughts than your thoughts."


This is my go-to verse in the event I ever feel like I need to ask God why. God is the creator of everything that I can think of, whether people, the earth and everything within it, space, planets, stars, etc. My thinking and ability to to comprehend is limited and no where near God's understanding of life. So when I feel frustrated and look to God asking why, this is a verse that I like to go to, because God will not answer every question that I have.


I find this very helpful in investing as well. No matter how good anyone may be at evaluating investment opportunities and succeeding, days, like today, will come and without all the explanation you desire, unfold in a way that is not easy to digest. This is especially the case with aggressive growth holdings, as pressure is created by severe market gyrations. To be successful long-term it is important to accept these days, just as I need to accept that God will not give me every answer I seek, while staying true to the long-term objective.


Coupang


Review

Coupang, Inc. (CPNG) is going public soon. I view Coupang as a great international play to add, especially for a portfolio like mine that has very high exposure to U.S. holdings. As the world comes out of COVID, there will be an increasing stance by Wallstreet to focus on international markets. However, the "rotation" from growth stocks to value, dividends, etc., is also going to be driven by Wallstreet, and will weigh on growth stocks as inflation increases.


It is of the utmost importance to invest in the strongest companies to maximize long-term gains regardless of the games that Wallstreet plays. Remember, they will buy anything no matter how horrific the business model may be, just to make a quick buck. At the same time, Wallstreet will look to reduce valuations for growth in the short-term so that they can accumulate more shares before an expansion back towards premium multiples ensues, it's all part of the game.


I subscribe to the 90-10 rule, which essentially assumes that 90% of public companies are not worth investing in, period. Look, I'm not trying to be arrogant, or flippant with a substantial majority of companies, many that provide strong jobs. But from an investment perspective, I find this rule to be very true. I've based this upon Revenue growth potential, current/future potential Cash Flow, Capital Structure, and many other variables such as legacy orientation, technology, industry peers, etc.


Coupang is a good example of a company that I consider fits well on the opposite side of the 90% not worth investing in. Coupang has potential to see robust Revenue growth, as well as sustained and/or improving Cash Flow margins over the mid-term. While the initial focus is on Korea for the short-term, there are international expansion opportunities as well. In Korea, there is limited foreign competition, so this is a market that Amazon (AMZN) and eBay (EBAY) have not been able to capture, similar to Latin America, where MercadoLibre, Inc. (MELI) has continued to dominate.


Korea is the fourth largest economy in Asia and the twelfth largest globally as of 2019, with a gross domestic product, GDP, of $1.6 trillion and GDP per capita of $31,847. Total spend in retail, grocery, consumer foodservice, and travel in Korea was $470 billion in 2019 and is expected to increase to $534 billion in 2024.


Coupang is the clear leader in Korea for e-commerce products and services by scale and operations. Like Latin America, Korea is home to one of the largest and fastest growing e-commerce opportunities anywhere in the world. Total e-commerce spend was $128 billion in 2019, which is expected to grow to $206 billion by 2024, implying a CAGR of approximately 12%. Total e-commerce spend for all Internet buyers in Korea is expected to grow from approximately $2,600 in 2019 to approximately $4,300 in 2024 on a per buyer basis.


Coupang is highly competitive with its services for the Korean consumer e-commerce market including:

  • Dawn and Same-Day Delivery. Millions of items every day—including fresh groceries—are delivered within hours via Dawn Delivery (ordered as late as midnight, arrive before 7am) or Same-Day Delivery (ordered in the morning, arrive same-day).

  • Next-Day or Faster Delivery for Nearly 100% of Orders. Customers are eligible for free, one-day delivery nationwide 365 days a year—even the day before gift-giving holidays like Christmas or Korean Thanksgiving. We have the fastest delivery service compared to other top product e-commerce players in Korea.

  • Last Order by Midnight. Customers are promised free, next-day delivery for orders placed any time of day—even seconds before midnight.

  • Vast Selection of Millions of Items, Including Fresh Groceries. Customers can order from a selection of millions of items across almost every category of goods—from tomatoes to TVs—for next-day delivery. We have the largest number of total SKU count for owned inventory products listed on our e-commerce apps and websites compared to other product e-commerce players in Korea. We also have the largest total SKU count for both owned inventory and third party products listed on our e-commerce apps and websites compared to other product e-commerce players in Korea.

  • Low Prices Every Day. Our end-to-end integration of technology and infrastructure, retail leadership, and significant scale economies generate cost efficiencies that allow us to pass along savings to our customers in the form of free shipping and low prices. Our strategy is to provide the lowest prices available in the Korean market.

  • Boxless / Zero Packaging. Our re-engineered fulfillment process eliminated cardboard boxes in over 75% of the parcels we package, and our latest innovation, Zero Packaging, first introduced for Rocket Fresh, eliminates almost all disposable packaging by delivering in eco-bags that are collected for reuse after each delivery.

  • Frictionless Returns. No need to pack a box or print a label. Our customers simply tap a button on the app and leave the item outside their door for pickup. Refunds are initiated the moment the item is picked up at the door.

  • 70% of the population lives within 7 miles of a Coupang logistics center. Our operational infrastructure spans over 25 million square feet across over 30 cities, a footprint of over 400 football fields in a country that is 1% the size of the US geographically. Coupang has the largest B2C logistics footprint as compared to other product e-commerce players in Korea.

Coupang has already provided its Amended S-1 filing that discloses the company's Shares Outstanding as well as the company's expected proceeds from a mid-point SP at $28.50. The SP is still undetermined and may increase further prior to it being set before the public listing. On that note, Coupang has also already received certification from the New York Stock Exchange, NYSE, approving the listing of its securities. Once a Notice of Effectiveness has been filed, the company will begin trading soon after. This may occur later this week, or next week.


Coupang's Revenue grew 91% to nearly $12 billion in 2020. This was primarily driven by Net Retail Sales growth of 91% to $11 billion, as well as 79% Third-Party Merchant Services growth to $790 million, and nearly 200% growth for Other Revenue to $133 million. Active Customers grew 26% to 14.9 million, and the Net Revenue per Customer increased by 59% to $256.


Active Customer growth was lower in 2020 versus 2019, while average customer spend accelerated strongly. This is indicative of Korea's lower e-commerce penetration, as well as competitive factors. I am somewhat skeptical of the reported information by Euromonitor International, as it appears to be pre-COVID for Korea's estimated growth rates for e-commerce through 2024. Coupang displayed very strong performance of existing and new customer demand by the increase in average customer spend through its platform. This suggests that customers using the platform substantially increased their e-commerce spend for the year including expanding product mix. Management alluded to COVID being a part of this performance, but not necessarily the key driver. The question to answer in 2021 is to what degree COVID added to growth. Korea's dealing with COVID led to less impact than the U.S., however, behavior may have still shifted towards e-commerce regardless. 2021 will shed further light on this.


Moving forward, it will be important to continue to gauge Korea's e-commerce penetration as a portion of GMV, as well as to consider Coupang's market share of e-commerce growth. Today, Coupang likely has a market share of around 7-8% of Korea's overall e-commerce sales. It will also be important to continue to see how much growth Coupang's Other Revenue segments increase as a portion of Revenue. Third-Party Merchant Services growth, among others, will likely improve the company's margins and Cash Flow.


I am modeling Coupang with a PT near $70 per share over the next 18-month period. This assumes 6 times EV/Revenue and 125 times OCF per share, including Revenue approaching $20 billion for 2022. With the current mid-point SP at $28.50 per share, I'm assuming demand, at a minimum, will drive first trading day SP towards $45. The flip side is that the final SP could still trek closer to $30-35, which means that the initial trading day SP could push higher towards $60. It's pretty easy to get ahead of Wallstreet on modeling future expectations, but it isn't as easy to get the best discounted SP. This would mean that based on market demand and final pricing, the multiples would need to be further scrutinized to determine whether the higher initial premium could be carried through the mid-term.


I believe that Coupang represents a compelling opportunity similar to MercadoLibre, in that both are engaged in robust growing e-commerce markets that have staved off competition from Amazon and eBay. I will likely initiate a position in Coupang's IPO day, but the level of initial investment will be dependent upon the final price, and trading price thereafter.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $3 billion (assumes midpoint $28.50 IPO pricing)

  • Revenues: $12 billion

  • Gross Margin, GM: 17%

  • Operating Cash Flow, OCF / Margin: $302 million / 2.5%

  • Free Cash Flow, FCF / Margin: ($156) million / (1.3%)

  • Shares Outstanding: 1.7 billion

  • Active Customers: 14.9 million

  • Net Rev per Active Customer: $256

  • Net Retail Sales: $11 billion

  • Third-Party Merchant Services: $790 million

  • Other Rev: $133 million

Valuation Metrics (assumes SP at $45 per share)

  • Enterprise Value, EV: $73.8 billion

  • EV/Revenues: 6 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 255 times

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