- Coupang's underlying business is solid
- The Korean e-commerce company is similar to Amazon and opposite to Amazon in some ways
- Wall Street remains bullish on the stock
Coupang (NYSE:CPNG) stock has fallen 64% from its 52-week high. In a market that has absolutely punished high-valuation, high-growth names over the past few months, the decline is hardly surprising.
Indeed, among roughly 750 large-cap stocks (market capitalization over $10 billion), 31 have fallen even further from their peaks than has CPNG. That cohort of fallen growth angels can be split into two basic groups.
The first includes companies where real questions have sprung up around what the business model looks like in a suddenly more difficult environment. The biggest large-cap decliner, Coinbase (NASDAQ:COIN), fits this description perfectly amid the “crypto winter.”
The second group is stocks where the underlying business still looks solid — but valuations at the highs simply got out of hand. The likes of Etsy (NASDAQ:ETSY) and PayPal Holdings (NASDAQ:PYPL) both might qualify.
Coupang seems like it fits that second group. The question is whether, even down by almost two-thirds, the stock still is too expensive.
The Coupang Story
The quick description of Coupang is that it's the “Amazon.com of Korea.” For the companies' respective core businesses, that description has some truth.
Coupang isn't quite as dominant as Amazon (NASDAQ:AMZN), admittedly. That latter company has about 40% of the e-commerce market in the U.S.; Coupang's share in Korea is in the range of 26%.
But Coupang is younger than Amazon. It was founded in 2010 and began selling its own inventory three years later. (In that way, Coupang is the opposite of Amazon, which started with owned inventory before adding its successful marketplace business.) Its share may well hit that 40% level within the next few years. In yet another echo of Amazon, Coupang's impressive fulfillment network offers free next-day delivery across Korea, and its scale and pricing appear unmatched in the country.
Coupang also has had success expanding beyond e-commerce. Coupang has entered grocery delivery via its Rocket Fresh offering; restaurant delivery via Coupang Eats (a market where Amazon Restaurants failed); and streaming media with Coupang Play.
The direct comparison to Amazon isn't perfect. The most notable distinction is that unlike Amazon (or China's Alibaba (NYSE:BABA)), Coupang doesn't have a cloud business. That business, Amazon Web Services, is hugely important to Amazon stock. AWS accounted for more than half of Amazon profit in 2021, and it probably accounts for something like two-thirds of that company's valuation. (Some investors would argue for an even higher proportion.)
Still, there are plenty of reasons why investors were so excited when Coupang went public last year. This is an attractive business showing strong growth: excluding foreign exchange movements, revenue increased 32% year-over-year in the first quarter, and 54% as reported in 2021. There should be more growth on the way.
Is CPNG Stock Too Expensive?
Of course, in retrospect it certainly looks like investors were too excited. Coupang's initial public offering was priced at $35 per share, while the stock began trading at $63.50. Though a sell-off followed, as recently as last July CPNG still was holding $40, giving it a market capitalization around $70 billion.
Even now, Coupang is valued at around $25 billion, and about $23 billion excluding net cash on the balance sheet.
That's a big figure. It's tempting to compare that valuation to Amazon — which after its own decline still has a market cap over $1 trillion — but, again, a decent chunk of that valuation comes from AWS. Another portion comes from Amazon's international business, which drove close to 30% of revenue in 2021.
Coupang doesn't have an international business — and it likely will struggle to build one. Chinese giants, including Alibaba, JD.com (NASDAQ:JD), and Pinduoduo (NASDAQ:PDD) all are expanding into Southeast Asia.
So, essentially, the best-case scenario for Coupang is that it becomes a combination of Amazon's U.S. e-commerce business plus DoorDash (NYSE:DASH) — but only in Korea. Those two American businesses combined probably have a valuation that tops out at $500 billion (and possibly much less, depending on an investor's view of Amazon's e-commerce valuation), in a country whose gross domestic product is about 12x that of Korea.
This admittedly imprecise model suggests a ceiling on Coupang's valuation around $40 billion at the highest. Given that the company is less mature than its U.S. peers, and not profitable (though the core business did post a profit in Q1), in that context a $25-billion valuation doesn't exactly seem like a steal.
A Changing Market
And that alone explains the big sell-off in CPNG stock since the IPO. Last year, valuation concerns for good businesses were often dismissed, particularly when those businesses were driving big growth. Now, profitability and valuation are much more in focus.
To be fair, even in that new environment, there's still a case for the stock. Wall Street analysts remain bullish: in April, Goldman Sachs put CPNG on its Conviction Buy list, with a price target of $37. After Q1 earnings the following month, Citi upgraded the stock, and Mizuho increased its target to $28.
Over time, Coupang certainly can outperform Amazon in terms of market share. New initiatives may have some success — and more such forays may follow. Investors believed the company could grow into a $70-billion valuation; a $25-billion figure offers a much lower bar.
The case for CPNG certainly has been strengthened by the sell-off; valuation at least has moved to the range of reasonable. Whether that's enough depends on how Coupang performs over the rest of 2022 — and how investors react during that same stretch.
Dislaimer: As of this writing, Vince Martin has no positions in any securities mentioned.