Time again for a quick look at another Motley Fool teaser pitch… this one comes from their Investor Digest email newsletter, and is a pitch for one of their upgrade “portfolio” services, Extreme Opportunities: Trend Spotter ($1,999, no refunds)
This portfolio is helmed by Seth Jayson and Emily Flippen, and we’ve looked at some of their teaser picks before — when you click through, the ad still hints at the same ones that they were pitching last August, but today the email pitch hinting at another recommendation points to something different.
So what is this “tiny new stock” they’re pitching as another winner of this exploding e-commerce trend? Who follows in the footsteps of MercadoLibre (MELI), Amazon (AMZN) or Shopify (SHOP)? Let’s see what they say…
“Last month, a little-known e-commerce stock – with wealth-building potential – became the newest stock recommendation in our Extreme Opportunities: Trend-Spotters portfolio!”
OK, so we know it’s e-commerce, and we know it was recommended in April. What else?
“You see, this tiny e-commerce company (1/25th the size of Amazon)…located in a country 3/20th the size of the US (South Korea)… recently had the largest U.S. IPO by a foreign entity since Alibaba went public in 2014.”
Ah, so that makes the Thinkolator’s work pretty easy this time… but just to be sure, let’s check and see what other clues they drop:
“It took the Amazon model and turned it on its head.
“For example, we all know about Amazon’s impressive delivery service. But this company delivers in a matter of hours. Orders placed by noon are delivered the same day — regardless of whether customers order milk along with a pair of headphones in the same order.
“To give you some perspective, just imagine if Amazon started competing with FedEx and UPS from the very beginning! That is the type of efficiency and service we’re looking at here….
“Nearly 70% of the population lives within seven miles of its fulfillment centers! “
You might have already guessed the company at this point, not a lot of South Korean e-commerce companies went public this year… but one of the points of pushback against this stock has been the fact that it’s “just South Korea” and they may not be able to successfully expand beyond their home country…. so this is how the Fool covers that notion in the ad:
“The company says it still accounts for a small percentage of the total retail, grocery, consumer foodservice, and travel market, which is expected to grow to $534 billion by 2024.
“You see, even though it’s dominating a smaller territory than Amazon, we believe it still has plenty room to grow!”
So what’s the stock? Well, as you’re probably guessing, we didn’t even need to gas up the Thinkolator for this one… the Fool Trend Spotter folks are recommending South Korean e-commerce giant (and recent US IPO) Coupang (CPNG), one of the biggest IPOs of recent years and a stock that has also gotten plenty of “free article” coverage from the Motley Fool.
And if they recommended it in April, it’s probably at least 15-20% below where they first recommended it, thanks mostly to the recent investor panic about growth stocks (or, depending on your perspective, the recent investor move to begin to wake up from their valuation fever dreams).
But I should note that I’m at least a little sympathetic with this idea, I thought the shares were being sold off too much given their strength in South Korea and their likely revenue growth, so, as I told the Irregulars in the last Friday File, I did also put on a speculative call option position in CPNG recently (a position which is also losing money so far).
If you’re saying to yourself, “gee, that sounds speculative and like maybe he doesn’t have enough conviction to risk a real position in the actual shares,” well, then you should listen to yourself more often. You’ve got the general idea.
What’s to like with CPNG?
Well, South Korea is a great market, and Coupang is the leading and the fastest-growing e-commerce company in that market. South Korea has high incomes, high population density, extremely high broadband penetration, and is generally a technology “early adopter” market — and Coupang is arguably on its way to being as dominant in South Korea as Amazon is in the US, with e-commerce market share, depending on how you measure, somewhere in the 25-30% neighborhood (some put it at 15-20%, but I’d say all those numbers understate their current and potential dominance, given that Coupang was more aggressive than the Amazon of a few years ago in building out a massive delivery infrastructure and is reportedly the only large player who has been taking share in South Korea in recent years).
And it’s growing like mad. Revenues grew by about 50% in 2019 and, with the pandemic boost that all e-commerce companies felt, by more than 90% in 2020, in the same neighborhood as Shopify. It’s also almost profitable (analysts think they’ll reach profitability in 2023) and has plenty of cash to fund growth, with a billion dollars in the bank even before the IPO (which raised another $4.5 billion).
They’ve also followed the brilliant Amazon Prime playbook well, launching free delivery for Rocket Membership subscribers who pay something like $3/month for the service — which is part of what fuels the super-fast delivery network, they say more than 99% of orders are delivered within 24 hours (and “Dawn Delivery,” where you order by midnight for delivery by 7am, is a huge hit in South Korea’s very urban work-focused communities). They said in their IPO filing that 32% of customers have signed up for the Wow Rocket membership that provides this free delivery service, among other benefits (so there’s probably room to grow there, too, about 2/3 of Amazon buyers are Prime subscribers).
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What’s not to like?
Well, the stock has come down considerably from the highs, and is back down to close to the IPO price… but it’s also still pretty expensive. At a $63 billion valuation, the shares trade at about 3.5X 2021 revenue estimates.
That’s almost exactly the same price/sales valuation Amazon carries… but Coupang is not Amazon, at least not yet. They aren’t profitable, they don’t have a lot of high-margin businesses like Amazon (no AWS, not much of a marketplace business), so their margins overall are quite a bit lower, though they do control the end-to-end experience well with their 15,000 delivery drivers. (Amazon, in case you’re wondering, has roughly 75,000 package delivery drivers, though most of them aren’t actual full employees like Coupang’s.)
Though, to be fair, when Amazon was approaching $20 billion in annual revenue they didn’t have much AWS or other high-margin revenue either, and they also weren’t profitable. You could have paid close to 3X revenues for Amazon during those years, in 2007 and 2008, but it was a very volatile stock at the time and you could have also paid 1X revenues at the low points while the market was crashing in 2008. Had you paid the maximum price, close to 3.3X sales in 2007 before the world fell apart, you’d still be in great shape today — Amazon’s revenue has grown by 2,700% since then, and the share price is up 3,300%.
We can’t really fairly compare Coupang’s valuation with the current numbers from the more software/service focused companies like Shopify and MercadoLibre, since they’re actually selling products as a direct retailer (CPNG has gross margins of under 20%, versus 42% for MELI and 56% for SHOP… even AMZN, which is growing services and marketplace sales much faster than direct retail sales, has gross margins of 27%), but the top-line growth is similar.
And while South Korea is a large economy, with close to $400 billion in annual retail sales, that does present a ceiling of sorts — there’s talk of Coupang entering other markets, maybe even expanding to Japan (Japan’s Softbank is a major Coupang investor), but that would be expensive and very competitive (for context, Japan’s retail sales market is about 3-4X the size of South Korea’s, the US market is about 15X). They can justify their valuation just by growing to take more share in South Korea, but it’s harder to daydream about 1,000% returns if they don’t grow beyond that market.
They do want to expand, that’s part of the reason for the IPO capital raise, and they have begun to expand with some caution into Singapore, a market that’s pretty similar to South Korea in terms of population density (though with lower median income), but they’re going to find other big competitors waiting in every country they consider… and since their model is not just “flip on a new market with a website” but requires a lot of infrastructure for overnight and same-day deliveries, it will take time and money to expand. And it might fail.
But still, I come back to the fact that this is the leading e-commerce company in a large and prosperous and fairly high-growth country, with substantial market share to take from rivals still, and it was growing at a strong clip even before the pandemic and accelerated with the pandemic’s e-commerce boost… and like most e-commerce companies, I expect, it’s going to keep most of those new customers who signed up out of necessity in 2020 (once you try something better, faster, cheaper or more convenient, you don’t usually go back). I’m not sure whether the market will decide to pay 3X sales for CPNG, or will panic in the next downturn and drive that down to 1X sales (like, say Japanese e-commerce giant Rakuten), so I’m still a little less than confident about what the right share price might be in the coming months… but the company itself seems to be doing extremely well.
And things are about to get more interesting. They report tomorrow, May 12, after the market closes… and also accelerated the lockup expiration from the IPO for some shareholders, so there could be some insider selling allowed after May 18 (about 34 million shares will become eligible for insiders to sell at that point, which is not huge but could be meaningful if a lot of folks decide to sell — that’s about 2% of the company, and roughly 4X the average daily trading volume)…. so the story could change quickly and the stock could easily bounce around quite a bit. Six months ago, this would have been a far sexier story than it seems to be right now in the market. Six months from now? Well, that’s anyone’s guess.
Thoughts on Coupang? Think the Motley Fool is right that they’ll be a big winner from the global e-commerce trends? Other favorites in the space? Let us know with a comment below.
Disclosure: Among the stocks mentioned above I own January 2023 call options on Coupang, and also own shares of Amazon and Shopify. I will not trade in any covered stock for three days after publication, per Stock Gumshoe’s trading rules.