Coupang Is The "Amazon of Korea"

I've written in the past about how I think the company with the most "economic moat" factors I've ever seen is Amazon (AMZN).

Think about it. The company has multiple NETWORK EFFECTS. For one, it is (by FAR) the largest e-commerce marketplace for 3rd party sellers to market almost anything to a massive, active customer base of over 310 million people. A 3rd party seller is going to find the most customers by selling through Amazon, and conversely, buyers are going to be able to find basically anything they are shopping for on Amazon. That helped make the marketplace a "first stop" for almost anything a customer wants to buy or a seller wants to sell - which eventually led to a CONSUMER BRAND asset (by lowering search costs).

The network effects don't end there, either. Amazon spent decades building out a world class fulfillment and delivery network, allowing it alone to deliver items at speeds that competitors simply cannot hope to match using 3rd party delivery. The delivery network also is an ECONOMIES OF SCALE advantage, allowing the firm to leverage its own fixed costs to deliver items at costs far lower than competitors can dream of.

There's more! With hundreds of millions of product ratings and reviews, Amazon's marketplace has a UNIQUE ASSET that nobody can hope to match in any reasonable amount of time. Considering 80% of buyers actually consider ratings and reviews before purchasing, that's a powerful differentiator.

Oh, and let's not forget Amazon Web Services (AWS), the cloud computing platform powerhouse that provides the technical underpinnings for firms like Netflix, Facebook, and ESPN. It has massive SWITCHING COSTS for the tens of thousands of companies that rely on it for their digital presence.

Alas, Amazon is not currently a Green Screen stock, and this review is not about that particular company. So what gives?

I mention Amazon because this review is about a company that is similar to Amazon - as it was 15 years ago. There are a few key differences which we will touch upon. But far more similarities.

Oh and one big difference - this stock is worth $30 billion, vs. Amazon's $1.3 trillion!

The Green Screen company we want to take a look at today is Coupang (CPNG). Does it make the cut for our Watch List? Let's dive in!

The Business of Coupang

I like the teaser here because Coupang could be most succinctly described as the "Amazon of South Korea". It is an online marketplace that sells both 3rd and 1st party inventory, ranging from typical consumer goods like electronics, apparel, and housewares, to being the largest online fresh food grocer in the country! The company also provides warehousing, fulfillment, and logistics infrastructure, as well as its own delivery network of over 15,000 drivers.

Starting to see the Amazon comparison? There's more!

Coupang also has its own membership program, called Rocket WOW. Customers pay an annual fee and in return get perks like unlimited free shipping, same-day shipping on qualifying items, and even free grocery delivery within hours. WOW customers also get friction-free returns - just leave the item at your doorstep, no box or label needed! Over 11 million of Coupang's 18.1 million active customers subscribe to Rocket WOW. It is very comparable to Amazon Prime.

Coupang has a few additional initiatives it calls "Developing Offerings". These include Coupang Play (a streaming video service, think Prime Video), Coupang Eats (restaurant delivery, think DoorDash), and Coupang Pay (a payment service like Apple Pay). At present though, these are non-factors, contributing less than 2% of revenue and unprofitable as a whole.

The Revenue Story

Coupang has been a rapid grower, with a 3-year compound annual revenue growth rate (CAGR) of 49%. Investors shouldn't get too excited about that number, however. 2020 and 2021 saw revenue increases of 91% and 54%, respectively, driven by COVID lockdowns and the resulting surge in e-commerce purchases. 2019 saw a 55% increase, but this was early in Coupang's growth ramp.

I think more reasonable growth numbers were delivered in 2022 and so far in 2023, where we see 12-15% growth. South Korea is the 6th largest e-commerce market in the world, worth about $150 billion at present and expected to grow 8% annually through 2027. Coupang should be able to ride this wave to grow with the market, and given its distribution advantages, looks poised to build on its 25% market share (for reference, Amazon has 38% share in the U.S.).

In addition to general growth in the SK e-commerce market, Coupang has its Developing Offerings mentioned earlier that could grow into meaningful revenue generators for the firm. We will have to see on those.

This is also a recurring revenue business. A large proportion of its sales are food and grocery, short-term consumables if there ever was one. Given its breadth of product offerings, many customers likely order from Coupang weekly or even daily (how often do you order from Amazon?). Additionally, about 2/3rds of active customers subscribe to Rocket WOW, a subscription product that recurs year after year.

Measuring the Moat

I started this write-up talking about Amazon's moat factors, and an argument can be made that Coupang claims many of the same advantages.

It can certainly be argued that Coupang has an ECONOMIES OF SCALE advantage from its delivery and fulfillment network, the largest in South Korea. This is a country that has no UPS or FedEx. By owning its distribution, Coupang can get items to customers both faster and cheaper, which is a massive advantage in e-commerce. Competing networks cannot be built quickly or cheaply.

As the largest e-retailer in the country, Coupang is becoming a regular part of its customer's buying habits. This triggers the "automatic purchase" BRAND advantage - Korean customers will think "Coupang" whenever they want to buy something with the convenience of their phone and delivered fast.

Finally, its marketplace - again the largest available - produces a NETWORK EFFECT. Sellers are drawn to sell on Coupang to reach the most buyers and utilize its fulfillment network. Buyers are drawn because of the superior product selection and unmatched delivery convenience. Both sides win - and so does the company!

There is plenty of competition. Gmarket (backed by eBay) and 11Street (backed by SK Telecom and Amazon) are both major competitors with more of a focus on third party marketplaces, and both sold more merchandise than Coupang as recently as 4 years ago. Delivery networks can be built out, and given South Korea's mainly urban population distribution, this isn't as daunting a task as it would be in a larger, more distributed country.

However, one consistent trend we've seen across geographies is that e-commerce tends to congeal into the hands of 1 or 2 dominant operators. This can be seen in the U.S. (Amazon and Walmart), China (Alibaba and JD), even Latin America (where Mercadolibre dominates). I believe Coupang is this winner in South Korea.

Management and Financials

Coupang was founded by Bom Suk Kim in 2010, and today he remains as CEO and chairman. He maintains 100% ownership of Class B "super-voting" shares, giving him dominant 77% voting power and essentially a 9% economic interest in the firm (worth about $3 billion as of writing).

Regular readers know I'm always on the lookout for founder-led companies. These firms tend to be run with a long-term purpose, as opposed to the quarter-to-quarter concerns of the public stock markets. Coupang meets this criteria in spades. That Kim has been able to build a firm of this size in a competitive market in just over a decade is impressive indeed. At just 44 years of age, Bom Kim should be at the helm for the foreseeable future.

Coupang has not only grown into an enviable market position, it has also done so with impressive financial metrics. Coupang's balance sheet is in excellent shape, with close to $4.5 billion in cash vs. $1.1 billion in debt. While the firm has spent most of its history (predictably) in a cash flow negative state, we are starting to see all those investments pay off. Coupang has delivered over $1.7 billion in free cash flow over the past 12 months, an impressive (for a retailer) 7.8% free cash margin. Cash return on invested capital sits at a weighty 39.1%.

I don't see much to be concerned about from a management or financial health perspective.

Risks

Coupang is a "high" risk stock in the context of our picks as a whole.

There are two main risks I see to my fair value estimate, aside from the typical competitive risks. The first is growth. It is not unfair to say that Coupang has limited growth potential in its home market. Over 30% of South Korea's total population (and likely over 50% of adults) are already active customers, and 60% of those are already Rocket WOW subscribers. Per-customer spend has only been growing in the mid-single digits. If SK's e-commerce market does not grow as fast as estimates, it will be pretty difficult for Coupang to deliver double-digit growth as it has no specific international ambitions.

The second is the ultimate level of profitability a general merchandise, majority grocery retail operation can reach. I've modeled for 6.5% free cash flow margin. Management has stated a goal to reach 10% EBITDA margins, which are a decent proxy. However, retailers with a large grocery component (like Walmart) only do 5-7% margins here in the U.S. There is no AWS to juice up margins here. And Coupang has been cash flow negative for most of its existence.

Location is also a notable risk. South Korea is obviously in a sensitive geopolitical area of the world, with a very hostile and erratic northern neighbor. Should the unthinkable break out, Coupang stock is going to get crushed.

Conclusion

There's a lot to like about Coupang. It has established a leadership position in South Korea's large and growing e-commerce space. This is a company with rising, recurring revenues, a plethora of competitive advantages, founder leadership, and strong, improving financial metrics. There are risks and uncertainties, but they can be properly discounted for. It earns a nod as a "green dot" stock.

So what is it worth? Modeling for about 13% annual revenue growth over the next 5 years at the previously mentioned 6.5% free cash margin, with 2.5% annual share dilution and a reasonably conservative 11.5% discount rate, I get a fair value estimate of $18.50 for Coupang. Currently trading just under $18, the stock looks reasonably priced, but not quite to our "margin of safety" target of 25% under fair value. That means we will place it in the Watch List today and look for a better entry point to buy, hopefully in the near future.