© Reuters. Withdrawal from Coupang presents an opportunity
Coupang (CPNG) is an e-commerce company. The company sells clothing, electronics, shoes, food products, furniture, nutritional supplements and other products, mainly in South Korea.
Coupang is often referred to as “the Amazon (NASDAQ 🙂 of South Korea,” but it also has its own unique characteristics. Due to the population density of South Korea and the logistics operations developed by Coupang, more than 95% of the items are delivered the next day.
The company claims that 70% of its customers actually live within 10 miles of a logistics center. This could prove conducive to higher retail margins than Amazon, which has to deliver over vast distances.
I am neutral on the CPNG share. (See CPNG stock charts on TipRanks)
Coupang is supported by SoftBank (SFTBF), which has close ties with Japan.
Given the constraints of operating only in South Korea, the Japanese market would be a dream expansion opportunity for Coupang. This does not mean that South Korea is undesirable. The country has a very tech-savvy culture and the e-commerce market is strong and growing every year.
However, the market in Japan is several times larger, but with more competition. With the support of Softbank (OTC :), Coupang has entered Malaysia, Singapore and now Japan.
Massive income growth
Coupang is in high growth mode with revenues increasing 72.7% for the first six months of 2021 compared to 2020. This is impressive, especially since the COVID-19 pandemic has pushed sales of e-commerce on the rise in spring 2020.
According to the company, the second quarter of 2021 was the 15th quarter in a row that sales were up 50% from the same period a year earlier.
As a retail business, Coupang has high cost of goods sold. For this reason, it is helpful for investors to focus on growing gross profit and then look at the income statement from there.
Gross margin increased 50% in the second quarter of 2021 compared to the second quarter of 2021. However, the company experienced a massive warehouse fire in the second quarter of 2021. This reduced the gross margin by 158 million of dollars due to loss of inventory. If it had not been for this non-recurring item, the gross margin would have increased by 86% for the same period.
The company is not yet profitable, and likely will not be for several years as it expands its operations. One problem that will need to be addressed is the rapid increase in general and administrative expenses.
The Japanese market already has serious competition within it, including Amazon, and it will be difficult for Coupang to make serious inroads there.
Additionally, issues have been reported with Coupang’s labor practices. Obviously, for a consumer-focused business, it can’t afford to have a damaged reputation.
Withdrawal of shares can be an attractive entry point
The CPNG stock traded as high as $ 69 after its IPO in early 2021. Since then, it has been in a steady downtrend.
At the time of writing this article, it is trading below $ 29. It’s hard to predict when this downtrend will end, and the drop below $ 30 can be a buying opportunity, albeit with caution.
It may take a catalyst, such as an expansion announcement, increased expectations, or declining profits to trigger a reversal. Coupang is expected to release its third quarter results in early November 2021.
The Taking of Wall Street
Wall Street analysts are pretty bullish on CPNG stock, with a strong buy consensus rating, based on three buy ratings and one outfit.
The average price target for CPNG is $ 43.33. This implies a potential upside of 53.3% from current trading levels. Analysts are pretty aligned with their goals, with $ 46 per share as the high price target and $ 40 per share as the low target.
There is something to be positive about Coupang. Growth and expansion of income are two examples. Gross margin is also growing even faster than revenue, which is great news for margins.
The flip side is that the company’s net loss is widening and the stock price is on a persistent downward trend. Coupang is a stock to watch, and perhaps gradually nibble on, but the company must show positive trends in third quarter earnings to justify a bullish call.
Disclosure: At the time of publication, Bradley Guichard held a position with CPNG.
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