coupang (CPNG) stocks had a strong quote in March 2021. This was a time when e-commerce stocks were doing well as the pandemic accelerated online shopping.
However, the positive momentum in CPNG stock faded rather quickly. What followed was a sustained period of downtrend for the stock. The sell-off appears to have accelerated, with CPNG stock falling 57% in the past six months.
At around $13 per share, Coupang stock appears to be trading at attractive levels. I believe the stock is about to make a reversal rally, so I’m bullish.
Reasons for the drop in inventory
Let’s take a look at the factors that triggered the sharp correction.
First and foremost, the pandemic period has been characterized by healthy growth of e-commerce businesses. With markets pricing in a relatively weaker post-pandemic growth scenario, the stock corrected.
Additionally, Coupang stock maintains a healthy growth trajectory. However, cash burn continued for the company. This is another factor that has had an impact on stock market sentiment.
However, it appears the stock has more than discounted growth and profitability concerns.
Positive industry outlook
It should be noted that even if an industry has tailwinds over several years, there may be short-term challenges. For example, the electric vehicle industry faces short-term chip shortages and raw material price inflation.
In a post-pandemic era, the e-commerce industry faces the challenge of relatively weaker growth. Coupang isn’t the only title to correct itself in the recent past. Most e-commerce stocks discounted relatively weaker growth.
That said, the outlook for the industry is solid over the long term. For 2022, the global e-commerce market is expected to be worth $5.55 trillion. Online purchases will constitute 21% of total retail sales in 2021. This number is expected to rise to 24.5% by 2025.
Obviously, the industry will continue to grow. The overreaction of the market therefore presents a good opportunity.
Coupang seems to be among the interesting investment options.
Growth likely to be sustained
For 2021, Coupang reported revenue growth of 54% to $18.4 billion. The company did not provide any revenue forecast for 2022. However, it seems likely that growth will slow.
At the same time, I don’t expect a very large decline in growth due to the following factors.
Coupang estimates that the total number of online shoppers in Korea is 37 million. Currently, the company has an active customer base of 18 million. There is therefore a large market that can be conquered in the years to come. In 2021, Coupang added 15 million square feet of infrastructure. The overall infrastructure ramp-up will help add new customers.
In January 2022, it was reported that Coupang planned to start its logistics business with a strong network and aggressive investments. CJ Logistics, the market leader in Korea, is losing market share and Coupang looks well positioned to make inroads.
In December 2021, Coupang reported cash and cash equivalents of $3.5 billion. This provides ample leeway for aggressive investments and growth in the logistics segment.
Coupang has also expanded into international markets to drive its growth. The company is already present in Japan and Singapore. It is likely that Coupang will enter the attractive Southeast Asian market in the coming years. As the addressable market expands, Coupang is positioned for continued growth.
Likely improvement in EBITDA margin
Coupang stock was also depressed with an increase in cash burn. For 2020, the company recorded an adjusted EBITDA loss of $357 million. However, for the past year, losses widened to $748 million.
However, it looks like the worst is over in terms of cash burn. For the current year, the company has forecast an adjusted EBITDA loss of $400 million. At the same time, Coupang expects the long-term EBITDA margin to be between 7% and 10%.
A gradual improvement in the margin is possible given the following factors.
First, for 2021, average annual customer spend has increased by 30% for each annual customer cohort dating back to the oldest in 2010. As average revenue per customer increases, this will have a positive impact on margin.
Additionally, in 2021, the company’s paying WOW members approached 9 million. With WOW membership offering discounts, same-day delivery, and travel discounts, among other things, membership is likely to continue to swell. Growth in recurring revenue is another factor that will support margins.
Overall, Coupang expects Product Trading Adjusted EBITDA to be profitable by the fourth quarter of 2022. If this guidance holds, CPNG stock should rise.
The Taking of Wall Street
As far as Wall Street is concerned, Coupang has a moderate buy consensus rating, based on five buy ratings and two hold ratings given over the past three months. The average Coupang price target of $28.33 implies an upside potential of 113.3%.
Coupang stock was punished by investors concerned about growth and profitability. However, the markets tend to overreact on both sides. It appears that the stock is oversold at current levels.
The Korean market is the third largest e-commerce opportunity in the world. It’s too early to disbar Coupang. The company expects an improvement in the EBITDA margin and continues to expand internationally for growth. Coupang also has a strong balance sheet to support near-term cash burn. The financial risk is therefore low.
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