2 Peter Chapter 1 verse 4 states, "Through these he has given us his very great and precious promises, so that through them you may participate in the divine nature, having escaped the corruption in the world caused by evil desires."
Make no mistake, there is definitely evil in the world. I don't need to look very far to see it, and far too often I am either affected by it directly or indirectly through others. The Bible through God's word, promises me that irrespective of evil and corruption in the world, that I can participate in the "divine nature", meaning that I can be in the world, but not of the world. Specifically, I can look to a higher providence and understand that despite the world being fallen, there is still hope, hope through Jesus Christ as Lord and Savior.
The final part of this verse, corruption in the world caused by evil desires, makes me think about my own flawed nature as a constant presence in the midst of managing the portfolio. It is very easy to take a biased view of an opportunity. For investing, the term investment bias is something to constantly be on the lookout for. Reading between the lines and identifying contrary issues to investment thesis' is always important. Revisiting the investment thesis and corresponding valuation is prudent.
As both Coupang, Inc. (CPNG) and Roblox Corp. (RBLX) have just gone public this week, I thought it would be helpful to provide an initial take on how I am looking at valuing both of these companies moving forward. There's already been a lot published regarding each company's opportunities, financials, etc., so I will focus on one method of doing this through peer valuation, specifically, to dissect how the market is valuing the company versus its peers. I will also provide insight into key financial modeling steps for each company's future.
Coupang is a unique opportunity for a couple of reasons. First, the company is a leader in Korea's e-commerce market, where roughly 7-8% of GMV for GDP can be attributed to e-commerce sales. This is about half of where the U.S. market is so Coupang as a leader has a large addressable market to grow into.
Second, the e-commerce market in Korea is better suited for domestic competitors versus companies like Amazon, Inc. (AMZN) and eBay, Inc. (EBAY). This means that the "Amazon effect" is not going to directly impact Coupang, although Amazon has invested in a Coupang competitor.
Based on Coupang's business model approach and potential, I see the company most similar to Amazon's early e-commerce days and JD, Inc. (JD) of China. I don't see the company as closely related to other major players focusing on e-commerce-based mobile/marketplace/gaming/fintech platforms such as Alibaba Holdings (BABA), Pinduoduo, Inc. (PDD), Sea Limited (SE), eBay, or MercadoLibre, Inc. (MELI).
Before getting into financial modeling and the peer valuation, directly below is Coupang's high-level financial overview.
Financial Metrics on a Last Twelve-Month, LTM, Basis
Net Cash Position: $3.7 billion (includes recent IPO capital raise)
Revenues: $12 billion
Gross Margin, GM: 17%
Operating Cash Flow, OCF / Margin: $302 million / 2.5%
Free Cash Flow, FCF / Margin: ($156) million / (1%)
Shares Outstanding: 1.7 billion
Active Customers Q4: 14.9 million
Net Rev per Active Customer Q4: $256
Net Retail Sales: $11 billion
Third-Party Merchant Services: $790 million
Other Rev: $133 million
Enterprise Value, EV: $80.6 billion
EV/Revenues: 6.7 times
Net Debt/OCF: N/A
Stock Price, SP/OCF per Share: 280 times
There is one important point to distinguish with respect to Coupang's financial modeling. The company currently has provided its most recent quarterly, Q4 2020, information for key Revenue drivers - Active Customers and Net Revenue per Active Customer. This is important because typically, companies provide an annual metric to understand how many customers have purchased goods from their platform during the course of the year, as well as the average spend per customer.
Currently, without this information (Coupang has not provided quarterly information for 2020 or any other entire year to average results), it is impossible to use Q4 2020 inputs to forecast future Revenue growth. I have deduced from available information, my assumptions in order to develop an initial forecast, but it will be important to get 2021 and 2020 quarterly year-over-year information to confirm/tighten these key modeling inputs.
That being said, the high-level target for Coupang to achieve is a 20% annualized Revenue growth rate through the mid-term. The other essential component is to see an expanding OCF margin towards 10%. These are the critical metrics to justify Coupang's valuation today, and moving forward.
Coupang Peer Group
At first look for Coupang's peer group, the metrics are somewhat complex as EV/Revenue and SP to OCF per share are all over the place. Also, I've included both Wayfair, Inc. (W) and Chewy, Inc. (CHWY) as I think both offer helpful insights to the discussion with Coupangl, as each company has a similar inventory-based model comparable to Coupang.
Upon closer review, it becomes quite clear that the companies with a more asset-light business model (eBay, MercadoLibre, Alibaba, Pinduoduo, Sea) have higher OCF margins, at or higher than 30%. Sea is an exception, but the company's business is not solely comprised of e-commerce, which skews the lower margin. But when it comes to valuation, the focus shifts more towards Revenue growth and scale.
The companies trading at the highest EV/Revenue premium include Pinduoduo, Sea, and MercadoLibre. These companies are also projected to see some of the fastest Revenue growth over the next couple of years. Next in line are Alibaba and Chewy, but Alibaba is dealing with a massive scale level that will continue to depress valuation as the market potential gets smaller. Chewy is a good example of the company's valuation being affected by lower OCF margin as a corresponding driver for a lower multiple. Coupang is projected to be the sixth fastest growing company out of this peer group over the next two years from my initial model. But the company still finds itself trading at a premium to Amazon, eBay, Alibaba, JD, Wayfair, and Chewy, and at the highest premium for peers relying on an inventory-based model.
For SP to OCF per share, the most extreme valuations include Coupang, Chewy, and Sea, again a direct relationship to growth potential, with the next highest being MercadoLibre and Pinduoduo, also driven by growth expectations. The remainder are trading very closely around 20-25 times OCF per share, with eBay being the exception which makes perfect sense as the company's growth prospects are by far the weakest.
The market seems to be pricing this peer group fairly consistently based on Revenue growth being the core driver. But it should be noted that all of these companies have witnessed stable to robust OCF performance, which is the most important metric that I value all companies on.
I like the comparison with JD the best out of this group. I think that Coupang will indeed have a chance to scale towards $30-35 billion in Revenue over the next five years, while at the same time, being capable of seeing OCF inflection towards a 10% margin, double that of where JD is today. Korean consumption per capita is stronger than China by about three times as of 2019 data, and e-commerce spend penetration is expected to nearly double over the mid-term. This sets Coupang up to be valued at around 75 times OCF per share by 2025 at a PT near $130 per share. At today's SP below $49, this reflects an annualized return at 22%.
By 2025, Coupang will still have a long runway of growth potential, that will need to translate to the company growing further into its OCF multiple. At some point over the next decade, the company will need to parallel its peers closer from a valuation perspective. At that time, the same considerations, Revenue growth, OCF margin, will determine the level and whether a premium remains.
Companies like Coupang and MercadoLibre and Sea, as well as new comers like Tokopedia/Gojek offer investors excellent exposure to non-U.S. markets that will not directly be impacted by the "Amazon effect". My average unit cost for Coupang is a little high right now at $58 per share, and I will accumulate further, but not until the SP drops to $40 or lower. I don't expect this to occur immediately unless major volatility ramps back up. I think investors getting in at today's price is excellent, and that patience needs to be in order with the market continuing to digest the opportunity.
Roblox is likely to become somewhat controversial as it sports a very strong premium valuation. The controversy will be tied to the company's ambitions to grow its DAUs from its strong adolescent market to adults. The key way to model Roblox is to estimate growth in DAUs and corresponding Average Bookings per DAU to get to a Bookings number. From there, it's an assumption based on the proportion of Revenue from Bookings.
This is at the root of potential controversy - can Roblox actually grow its DAUs stronger for adult gamers? I'll let the company's performance over time be the deciding factor on that one. For me, I am intrigued by what management has recently stated. They expect a deceleration in Revenue growth for 2021 from pandemic levels in 2020, which makes sense right. Well, deceleration is equated to 60% growth for 2021, stemming from the major increase in Bookings during the pandemic - this equates to Revenue of $1.5 billion.
But management has also stated that they expect re-acceleration for Revenue during 2022, which means, growth north of 60%. At a minimum, this would equate to $2.5 billion in 2022 Revenue. The drivers will be transition of DAUs to adults, combined with growth in western Europe and Asia. Management is going out on a limb here as if growth is anywhere lower than these estimates, the SP will get punished.
So what does all this mean over the mid-term? It means if Roblox can grow DAUs 25% annualized over the next five years, the company may very well be on track to generate $6 billion in Revenue. This gets us to an important point. Roblox doesn't just simply consider itself a gaming company. It considers itself a social experience, in a metaverse environment. This bridges those who want to create their personality in this metaverse, and those that want to develop games, or environments as part of the metaverse. To this point, if Roblox can continue to expand DAUs and developers, which stand at 32 million and 7 million respectively, the potential may be highly robust.
Roblox management also expects the company's OCF margin to contract back to 22% from the insane 57% level during 2020. I am modeling the company to witness expansion towards 25% over the mid-term, which is likely conservative in the event DAUs and developers scale robustly.
To the point mentioned above, Roblox considers its competitive market to be vast. This is reflected by the company's Hours Engaged metric which stood at nearly 31 billion for 2020. As a comparison, Roku, Inc. (ROKU) witnessed use of nearly 59 billion Streaming Hours. Roblox is no slouch when it comes to potential, and is why Cathie Wood was a buyer on the IPO day.
Roblox Peer Group
Valuation comparison among the company's competitive peers is much more simple and straight forward than Coupang. Roblox is overvalued by the highest margin right now. The only companies that compare are Unity Software (U), Pinterest, Inc. (PINS), Roku, and Snap, Inc. (SNAP). But the important thing to pay attention to is Roblox's Revenue estimated growth rate. Over the next two years, I am modeling Roblox to grow at an average rate of 65% for Revenue (predominantly driven by management's expectations), far above this peer group. As such, the company is potentially at a discount versus Unity for EV/Revenue by 2022, and is poised to catch up quickly to Pinterest, Roku, and Snap.
Clearly, Revenue growth is the key driver for EV/Revenue valuation. Looking to the OCF per share multiple, and Roblox is fairly valued today. Roblox's SP to OCF per share is lower than Netflix, Inc (NFLX), and substantially lower than Unity, Pinterest, Roku, and Spotify Technology (SPOT). It should be noted that Netflix will likely revert back to negative OCF once spending for content resumes post-COVID. Contrarily, The Disney Company (DIS) should see its OCF multiple contract as Cash Flow improves with theme parks resuming operations.
Most of this peer group has SP to OCF per share multiples in a range from 20 to 35 times, with most exceptions being due to COVID impacts. As Roblox's OCF margin contracts back to 22%, I am modeling the company to trade 90 times OCF per share in 2022, with this multiple declining towards 50 times as the company continues to scale over the mid-term. This is much stronger growth into valuation than Netflix, Pinterest, Roku, Spotify, Unity, and Snap over the mid-term.
I am a believer in Roku and its a reason why its a top ten holding. I think that Roblox is a very interesting company with a unique opportunity. I recently liquidated the position in Spotify as it doesn't have the same prospects as both of Roku and Roblox. Like Coupang, it is prudent to consider the potential valuation and recent IPO price movement.
My average cost basis in Roblox is $64.50. Over the mid-term I am modeling the company to trade with a PT towards $150 per share driven by DAU and Bookings growth. This reflects a potential annualized return of 18%. As such, I will look to accumulate the position towards a lower cost basis of $55 per share or lower. Similar to Coupang, I don't expect a corresponding SP decline to be immediate, unless volatility picks up again.