When considering investment opportunities, investors often seek out fast-growing stocks with significant potential. However, investing in growth companies typically involves trade-offs. Some companies exhibit impressive top-line growth but are not yet profitable, while others showcase remarkable customer expansion but face cash burn challenges.
Enter Coupang (NYSE: CPNG), a South Korean e-commerce company that appears to embody the characteristics of the ultimate growth stock, successfully navigating various aspects of growth investing. While every investment carries inherent risks, Coupang’s performance leaves little room for criticism. Let’s delve into the reasons why it might be considered the ultimate growth stock worth buying at this moment.
Following a proven blueprint
Drawing parallels between younger and older companies is a common practice on Wall Street, even though it can be perceived as unfair to the newer entrants. In the case of Coupang, the resemblances in business models with Amazon are notably striking.
Coupang has strategically positioned itself by prioritizing the customer experience, taking cues from the success stories of other e-commerce giants. The Rocket delivery services, offering options like dawn (order at night and receive it by morning), same-day, and next-day delivery, showcase the company’s commitment to swift and efficient service. Customer convenience is further enhanced through hassle-free returns, allowing items to be left outside for Coupang to pick up.
While e-commerce serves as the cornerstone of its business, Coupang has diversified its offerings to include food delivery, streaming video, and a membership program. This program, featuring perks such as unlimited free shipping, grocery delivery, and various discounts, represents a small percentage of the overall revenue at present. However, there’s potential for these supplementary services to evolve into a more substantial part of the business over time.
Growing and keeping customers
With a business like Coupang, one of the most important metrics to follow is the growth of its customer base. Not only has its number of active customers been growing, but the rate of that growth has been accelerating.
A notable trend at Coupang is the consistent increase in spending by new customers each year, surpassing the expenditures of their predecessors. In simple terms, customers who joined the platform in 2023 spent more in their first year than those who joined in 2022, a pattern observed since 2018. Moreover, all customer cohorts exhibit a propensity to spend more over time, contributing to the reported revenue and profitability growth.
Adding to the positive narrative is the remarkable growth of Coupang’s membership program, Rocket WOW, outpacing the expansion of active customer numbers. While active customers witnessed a 16% year-over-year growth in 2023, Rocket WOW membership surged by an impressive 27%.
This development is noteworthy for two key reasons. Firstly, Rocket WOW subscription revenue carries higher margins, enhancing the overall profitability profile. Secondly, these members play a pivotal role in driving platform spending. For instance, following the introduction of the Rocket WOW membership, Coupang experienced a doubling of order volumes in its food delivery service.
Where does Coupang go from here?
As one of the prominent e-commerce players in Asia, Coupang has primarily concentrated on the South Korean market. However, a recent foray into Taiwan has yielded positive results. Over the past two quarters, active customers and revenue in Taiwan have doubled, and the company anticipates achieving profitability in the region at a faster pace compared to its South Korean expansion.
In the realm of high-growth companies, premium valuations are often the norm. While Coupang may not be considered cheap, its valuation is compelling when juxtaposed with some of its peers. Notably, Coupang’s price-to-sales multiple stands at 1.4, which is lower than Amazon’s (3.2) and Latin American e-commerce giant MercadoLibre’s (5.7). Furthermore, Coupang’s price-to-free cash flow multiple of 19.0 aligns closely with MercadoLibre’s (17.7) and significantly undercuts Amazon’s (57.6).
The enticing combination of robust customer growth and an upward trajectory in financial metrics positions Coupang as an attractive investment opportunity. Its reasonable valuation further adds to its appeal, making it a compelling choice for potential investors.
