I’m starting this post off a little different - I’m sharing something personal. A few days ago, I accepted the Congressional Gold Medal on behalf of my grandfather for his service in World War II. Specifically, he was awarded the Congressional Gold Medal for Chinese-Americans (see below) and I am so incredibly proud to be his grandson. Side note: big shout out to the Chinese American WWII Veterans Recognition Project for bringing this project to life and pushing it through Congress in 2018.
And I wanted to share his story. He was born in 1918 and immigrated to San Francisco in 1936 via the Angel Island Immigration Station. Read that sentence one more time for me…he left China at the ripe age of 18 for an unknown country without knowing any English and fucking made it happen. Side note: if you live in the Bay Area and you haven’t visited Angel Island and the immigration station, you need to go. It’s a beautiful day trip and you learn about the brave families and their amazing stories pursuing the American Dream.
In 1942, he served in the Army during World War 2 and he wasn’t even a citizen yet. He represented the USA and fought for a country that DIDN’T recognize him as a citizen. And this wasn’t uncommon. Around ~20,000 Chinese-Americans fought in WW2 and most weren’t recognized as true citizens. Talk about sacrifice. Talk about grit. Talk about fight and laying down the foundation for future generations.
Fast forward a few generations, my grandparents started a restaurant (that is still running today), put 9 children throw the UC system, and have +25 grandchildren continuing and upholding their legacy.
To put it simply, my grandfather and grandmother are my heroes. And I’m so grateful for the memories we got to share. Thanks for everything Gong gong and Po Po.
“I am a warrior, so that my son may be a merchant, so that his son may be a poet.”
― John Quincy Adams
The amazing thing here is that everyone has a family story. Everyone has that one dude or dudette that made IT happen. If you’ve got a story, I’d love to hear about it.
Note: I am grateful and lucky that my family has been able to capture most of my grandparents’ story and I will treasure it forever.
Shower-thought: Memories are inherently selfish and about ‘me’. I wish I could relive and remember memories from another’s perspective.
This week we are going to be looking at Coupang ($CPNG). As a reminder: The Rookie wants to own businesses that 1) I like, 2) are growing, 3) generate a high amount of free cash flow, 4) have future optionality, and 5) are led by a great management team. NOTHING HERE IS INVESTMENT ADVICE. DO YOUR OWN WORK.
Talk about abrupt changes. Moving directly from an American Dream story to stock investing definitely makes business breakdown seems less important.
To ease with the transition, here are two jams that have been on repeat:
Let’s do this.
Coupang ($CPNG)
Step 1: Do I understand and like the business?
Why review $CPNG? First off, I have a soft spot for anything Korean. I taught English in Korea for a year and loved everything about it.
Aside from my love for Korea, I wanted to better understand the risk/reward opportunity of the “Amazon of Korea”. We’ve seen other Amazon-esque e-commerce companies have huge success in their local countries/regions: $MELI in LATAM, $SE in APAC/LATAM, $PDD in China, $OZON in Russia, and the list goes on and on. Just about every region and country of the world has their version of Amazon.
What about Korea? Putting it simply, $CPNG dominates the Korean peninsula. Here are some quick facts to support that statement:
$CPNG delivers FAST shipping - order an item before midnight and expect it to arrive before 7am the next day -
$CPNG delivers nationwide, 365 days a year, within hours of the whole Korean population
75% of $CPNG parcels’ come in eco-bags that they collect for reuse after each delivery
$CPNG owns and operates 100 unique fulfillment centers which puts $CPNG within 7 miles of 70% of the Korean population
But how does $CPNG describe themselves…“We are a leading e-commerce player in Korea. We believe that we are the preeminent online destination for e-commerce in the market because of our broad selection, low prices, and exceptional convenience across our owned inventory selection as well as products offered by third-party merchants. Our unique end-to-end fulfillment, logistics, and technology network enables Rocket Delivery, which provides free, next-day delivery for orders placed anytime of the day, even seconds before midnight—across millions of products” (10Q, 21’).
Pause…I love living right now. I can order anything and get it delivered to me in hours. Woof.
Resume…a couple things I love about $CPNG is that they have a “tried and true” business model, they have industry leading customer satisfaction scores, and multiple revenue streams from their Rocket WOW memberships and e-commerce platforms.
Just like how Amazon has Prime, $CPNG has Rocket. There’s Rocket WOW, Rocket Delivery, Rocket Fresh, and Coupang Eats. I love this optionality as it essentially makes $CPNG’s revenue streams anti-fragile, and expands customer loyalty and penetration.
One metric that jumps off the page is ‘Total net revenues per Active Customer’ and $CPNG kills it.
The ‘so what’ here is that once customers start using the $CPNG ecosystem not only do they come back, but they end up spending more money. This should sound familiar to Amazon’s story with Prime as well. A study conducted in 2018, showed that “Prime members buy an average of $1,400 a year worth of stuff on Amazon, regular customers only spend $600, the study found” and I am sure this has only increased.
And $CPNG is copying this playbook. Me gusta.
Verdict: I’m game. I understand the business and like it.
Step 2: Moat and Future Growth/Catalyst
Let’s start with the good.
In Q2-21’, $CPNG had Revenue Growth of 71% ($4.5B) and adjusted Gross Profit Growth of 86%. And they’ve had a track record of success…“Q2 marked the 15th consecutive quarter with over 50% year over year growth”. I LOVE THIS. Not only does this prove out success, but it shows that management knows how to operate.
They continue to expand their ‘Active Customers’ - total Active Customers increased 26% year over year to 17 million and Revenue per Active Customer grew 36% year over year - which as a reminder, is a VERY good thing.
And talking about having optionality, $CPNG’s Fresh , “grew revenue over 100% year over year exceeding $2 billion run-rate”.
So the company is firing on all cylinders. $CPNG dominates Korea and will try to squeeze as much $$$ out of the peninsula as possible, but is it enough?
I think you understand what I am getting at…$CPNG has a great brand. It has a great service and product. But it’s all based in Korea.
Korea has around 52 Billion people and $CPNG already accounts for more than 24.6% of market share. How much more can they really get? To put this in perspective, Amazon has ~40% market share of e-commerce in the US (different sources have varying % of market share for Amazon, but it’s generally A LOT).
But comparing Amazon to $CPNG doesn’t really help. The USA is HUGE compared to Korea so even if $CPNG captured +60% of the e-commerce market in Korea this wouldn’t really do it for me.
$CPNG is a story about TAM. TAM. TAM.
We need to find $CPNG’s AWS? Where are $CPNGs growth opportunities?
$CPNG has started to look abroad.
And recently, we’ve seen more and more $CPNG job posting for top level executives in countries like Singapore. You can even look over their Career Website and see the different countries they are expanding into: Taipei, Singapore, Japan, Hong Kong, etc.
I really love that $CPNG is expanding into new countries, BUT we don’t have proof of success yet. And competition is extremely tough in APAC. And we’ve seen from past experiments, entering into a new country as an e-commerce player can be extremely difficult.
Even Amazon couldn’t do it. Amazon spend billions trying to get a foothold in China, but even they couldn’t do it. $CPNG provides an amazing service and customers love them, but e-commerce is different in every country.
Buyers have different habits, brands are different, business operations are different, etc. And on top of this, $CPNG faces competition from companies like Sea Limited, Alibaba, Shopee, etc. These companies are giants and they have tons of $$.
Can $CPNG grow outside of Korea without burning cash? This feels like a losing battle where $CPNG ends up spending billions of dollars for micro-level increases in revenue and market share.
The one question I have for $CPNG’s management is what is their ‘blue ocean’? What is their AWS? How can $CPNG expand it’s revenue streams in a meaningful way away from e-commerce and delivery based-subscription plans?
I don’t have the answers, but it’s something I will be watching.
Verdict: B-. I like $CPNG. They will continue to own and grow within their home market, but if they truly want explosive growth, they will need to look abroad. And expanding outside of Korea will be difficult and costly.
Step 3: Management
Bom Suk Kim is the Founder, Chief Executive Officer and Chairman of the Board. As you know, I love founder-led companies. And he has surrounded himself with talent. His other C-Level members have experience at Flipkart, Amazon (AWS too), VMWare, etc.
Bom Suk Kim still owns a ton of $CPNG. And I like this. I generally like ownership that has their money aligned with the business. When they get rich, I get rich too.
One thing I loved while reading $CPNG’s financial statements is that management recognizes how important their people, culture, and talent are, “Our culture has been critical to our success and if we cannot maintain this culture as we grow, our business could be harmed”.
I RARELY SEE THIS MENTIONED!
Taking all of the data points into account: high customer satisfaction and loyalty, high insider ownership, founder-led, etc —> it seems like management knows what it’s doing and knows how to execute.
Verdict: Pass.
Step 4: Valuation
Now onto the fun part. Here are the numbers:
Market Cap: ~$50B
Enterprise Value: ~$48B
Shares Outstanding: ~1.7B
NTM Total Enterprise Value / Revenues: 2.09x
Price to Sales: 3.06x
Gross Profit Margin: 17%
Current Ratio: 1.3x
$CPNG is down 40% since their IPO and this really comes down to $CPNG’s growth prospects and the question marks around their future growth. If you care about TAM, then $CPNG isn’t the stock for you. If you don’t care about TAM, then $CPNG is really interesting.
Before I preface my valuation, based on your STORY and your guesstimate on $CPNG’s TAM and growth rate, you could have a wildly different outcome! Do your own homework.
As always, I like simple math. I ran a ‘rough’ DCF with the following assumptions: a discount rate of 10%, growth rate of 45% (years 1-5) and 30% (years 6-10), and a terminal multiple of 5x. With these numbers, I got a rough range of $50- $46. If you apply a 15% Margin of Safety (on the low end) you get a rough value of ~$40/share.
Currently, $CPNG trades at ~$29.
As with any valuation model, you could’ve applied other assumptions and ended up with different numbers. Everything is a ‘guesstimate’ when it comes to DCFs.
Verdict: Assuming continued high growth rates, $CPNG trades at a discount to my valuation. Pass.
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Score 49 / 81
If you care about TAM, then $CPNG isn’t the stock for you. If you don’t care about TAM, then $CPNG is really interesting.
Overall Verdict: I like $CPNG a lot. They are a leader in a growing market and well positioned to take advantage of any tail winds. With that said, $CPNG faces real challenges as it looks to expand into new countries. THIS ISN’T INVESTING ADVICE. GO DO YOUR OWN WORK.
Things to watch for:
Will $CPNG be able to expand outside of Korea?
Can $CPNG increase it’s Gross Profit Margin?
Source of everything here came from: Coupang Investor Relations
Here’s another view on $CPNG from two much smarter dudes: