Coupang (NYSE:CPNG) has rapidly ascended to become a dominant force in South Korea's e-commerce sector, often compared to the Amazon (NASDAQ:AMZN) of South Korea due to its customer-centric, logistics-driven approach. However, Coupang's operations go well beyond e-commerce; it has cultivated a full ecosystem of services that provide convenience and added value to its customers. In this article, we'll explore the company's model, recent growth strategies, and why it holds strong potential as an investment.
Building a Comprehensive EcosystemCoupang's business model revolves around its proprietary "Rocket Delivery" system, offering same-day and next-day delivery for orders received by midnight, with packages often delivered by 7 a.m. the following morning. This fast delivery is possible due to Coupang's extensive logistics network, which includes over 100 fulfillment centers across South Korea. The strategic placement of these centers allows Coupang to reach 70% of the South Korean population within a 7-mile radius. While the company has made significant investments in infrastructure, these investments create long-term competitive advantages. High entry barriers mean that any new entrant would face significant costs to replicate Coupang's logistics scale, and they would still have to win over Coupang's loyal customer base.
Coupang holds the highest market share in South Korea's e-commerce sector, effectively competing against both local and international players. Its commitment to rapid delivery, competitive pricing, and a diverse product selection has solidified its reputation as a leading online retailer.
Source: Author based on Statista
Beyond e-commerce, Coupang's ecosystem includes a variety of offerings:
Rocket Fresh: A grocery delivery service that delivers by 7 a.m. if orders are placed before midnight.
Coupang Eats: A restaurant delivery service similar to Uber Eats.
Coupang Play: A subscription-based video streaming platform.
Coupang Pay: Coupang's fintech arm, providing digital payment solutions.
Rocket Wow: Similar to Amazon Prime, this paid subscription service includes perks like free and expedited delivery options, exclusive discounts, and access to Coupang Play content.
Another key feature, Rocket Direct Purchasing (also called "Rocket Jikgu"), enables South Korean customers to purchase international products directly from countries like the United States, China, and Japan, with Coupang handling all logistics, customs, and delivery. Additionally, Coupang Flex provides flexible, part-time delivery opportunities known as Flexers, similar to DoorDash's (NASDAQ:DASH) drivers Dashers.
WOW Membership
WOW members increasingly recognize the value of their membership, which includes benefits such as free same-day and dawn delivery, free returns, exclusive content on Coupang Play, and discounted deliveries from Coupang Eats. This strategy has proven effective in increasing user engagement. For example, Coupang recently introduced a 5% to 10% discount on Eats orders for WOW members, resulting in a 90% increase in Eats orders by WOW members and more than doubling Eats' transaction volumes in many regions.WOW members who use Eats also exhibit higher retention and engage more frequently across Coupang's ecosystem. This engagement translates into higher spending and cross-category purchasing, demonstrating the strength of Coupang's subscription-driven loyalty model.
Coupang's Entry into Luxury Fashion
In January 2024, Coupang acquired Farfetch (OTC:FTCHQ) Holdings plc, a leading global online luxury fashion platform, for $500 million. Farfetch, previously battling high debt and consistent losses, had established itself as a significant player in luxury fashion but struggled with profitability and logistical challenges in a highly competitive space.Coupang views the acquisition as an opportunity to tap into the rapidly growing global personal luxury goods market, valued at around $400 billion. With this acquisition, Coupang can leverage its advanced logistics infrastructure to make high-end fashion more accessible and improve delivery standards for luxury goods, particularly in South Korea, where consumers are among the world's highest per capita spenders on luxury items. This acquisition provides Coupang with a unique positioning, combining speed and premium service for luxury shopping.
Looking forward, Coupang plans to stabilize Farfetch's operations through the end of the year and explore potential synergies between the two companies in 2025. This integration could unlock new revenue streams and operational efficiencies, further strengthening Coupang's long-term growth prospects.
Expansion into Taiwan
Beyond South Korea, Coupang has been selectively expanding internationally. In June 2021, Coupang began operations in Japan, aiming to replicate its South Korean success. However, the company faced stiff competition from established players like Amazon and Rakuten and ultimately ceased operations in March 2023.Around the same time, Coupang also launched in Taiwan, where its signature "Rocket Delivery" service quickly gained popularity. By November 2023, Coupang had opened a second fulfillment center in Taoyuan City. Taiwan has been a success story, with Coupang's app becoming one of the most downloaded shopping apps in the region. Coupang's experience and learnings from South Korea have allowed Rocket Delivery to scale even faster in Taiwan. Management is leveraging advanced technology and processes developed over the years that enable Coupang to reach profitability in Taiwan faster than in Korea.
FinancialsIn the most recent quarter, Coupang's revenue grew 32% year-over-year (YoY) in currency-neutral terms, or 25% excluding Farfetch. This marks the 14th quarter out of the past 15 that Coupang has achieved at least 20% constant currency growth. Gross margin expanded by 350 basis points margin expansion in gross margin though a rise in general and administrative expenses from investments in automation, technology, and infrastructure kept the operating margin flat YoY. Adjusted EBITDA rose to $343 million, a 44% increase YoY, or $345 million excluding Farfetch.
Product commerce revenue increased by 20% YoY, reaching $6.9 billion, with an adjusted margin of 6.8%, up 10 bps from the previous year. Coupang's active customer base reached 22.5 million, driven by deeper engagement within existing customer segments and the expansion into new categories like Fresh and Fulfillment and Logistics by Coupang (FLC). Long-term growth is expected to be supported not only by these newer offerings but also by increasing spending from both existing and new customer cohorts, all of which saw notable spending growth this quarter.
Developing offerings increase 347% YoY to $975 million. This segment includes services such as its signature "Rocket Delivery" to new customers in Taiwan, Coupang Eats, Coupang Play, Fintech Services and Farfetch Integration. Despite the strong revenue growth, Developing Offerings maintained negative margins, with an adjusted margin of -13% (representing a $127 million loss). While still in its growth phase, this segment is crucial to Coupang's diversification strategy and future growth.
Farfetch alone contributed $439 million in revenue this quarter. Initially, Coupang aimed for near break-even profitability for Farfetch by the end of the year, but CFO Gaurav Anand recently noted that Farfetch is nearing break-even earlier than expected. For now, Coupang is focused on stabilizing Farfetch, with plans to assess and pursue synergies between Coupang and Farfetch in 2025.
Although cash flows dipped slightly, this was not primarily due to Farfetch. Operating cash flow declined 54% YoY to $334 million, while free cash flow came in at -$42 million. Coupang attributed this drop mainly to one-time working capital benefits from the previous year. Over the past four quarters, Coupang has generated over $800 million in free cash flow, more than half of what it generated in the prior period. The company maintains a healthy balance sheet with over $5.8 billion in cash and $1.6 billion in debt.
RisksWhile Coupang's growth story is impressive, several risks could impact its trajectory. In June 2024, South Korea's Fair Trade Commission fined Coupang 140 billion won (approximately $102 million) for allegedly manipulating search algorithms to favor its private-label products. This regulatory scrutiny could lead to increased compliance costs and require operational adjustments to align with fair trade practices.
The integration of Farfetch and international expansion add complexities around operational alignment and synergies. Coupang's experience in Japan, where it ceased operations due to strong competition, highlights the difficulties in expanding internationally. While I like how management acknowledged the error and ceased operations and despite Taiwan's expansion appears more promising, the challenges of replicating its South Korean model in different markets require ongoing adaptation and monitoring.
Valuation
Source: Author
As Coupang works toward consistent profitability, traditional price-to-earnings (P/E) metrics are not yet applicable. However, its price-to-sales (P/S) ratio, currently at 1.61x, is lower than that of peer companies like Amazon and Alibaba (NYSE:BABA). This discount reflects Coupang's smaller size and earlier stage of maturity compared to its peers. Nonetheless, for growth-focused investors, Coupang's projected revenue growth rate of over 20% for the next two years is an attractive proposition.
Lastly, using a discounted cash flow analysis, combining a multiples-based approach and a perpetuity growth model, I estimate Coupang's intrinsic value to be around $35 per share, suggesting a potential 40% upside from current levels.
Source: Author
My Final TakeCoupang's rise in the e-commerce sector reflects its innovative logistics, customer-centric strategy, and expansion efforts beyond its core market. The Farfetch acquisition shows the optionality of Coupang and exemplifies the company's ambition to diversify its revenue streams, while the expansion in Taiwan highlights Coupang's adaptability and learning curve after the challenges faced in Japan. Given its growth potential, valuation, and strong positioning in South Korea and Taiwan, I believe Coupang has the potential to be a market-beater in the coming years.
This content was originally published on Gurufocus.com
