South Korean Labor Costs And Asian Regulations Will Erode Margins

Key Takeaways

• Rising labor costs, regulatory risks, and continued capital spending threaten long-term profitability by increasing expenses and challenging free cash flow.
  
• Expansion abroad and intensified competition may drive sustained losses, increase earnings volatility, and erode market share over time.
  
• Strong revenue growth, operational efficiencies, and strategic investments in logistics and expansion are enhancing profitability, customer retention, and long-term shareholder value.

Catalysts

Owns and operates retail business through its mobile applications and internet websites in South Korea and internationally.

• Coupang's long-term profitability is threatened by rising labor costs and the demographic challenges in South Korea, such as a shrinking workforce, which will significantly elevate operating expenses and strain last-mile logistics, leading to compressed net margins regardless of near-term gains in automation or process improvements.
  
• Heightened regulatory scrutiny and potential shifts in digital commerce or data privacy laws across Asia pose substantial long-term risks, as tightening regulations could increase compliance burdens and restrict Coupang's ability to leverage customer data, ultimately suppressing revenue growth and profitability.
  
• The company's heavy reliance on sustained capital investment in fulfillment and logistics infrastructure may hamper the realization of positive free cash flow over the long term, as persistent spending is needed not only for maintaining competitiveness but also to keep pace with rising costs associated with technology and automation, thereby depressing net margins.
  
• The expansion into international markets like Taiwan could drive prolonged periods of operating losses, as these early-stage segments struggle to reach scale and efficiency levels seen in Korea, resulting in persistently high effective tax rates, increased group-level earnings volatility, and muted group profitability for the foreseeable future.
  
• Intensified competition from global e-commerce giants and nimble local players, combined with the ongoing shift to direct-to-consumer brands and alternative commerce channels, threatens Coupang's ability to maintain market share, leading to erosions in topline revenue growth and pressured earnings as customer acquisition costs rise and pricing power declines over the long run.

Coupang Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Coupang compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Coupang's revenue will grow by 13.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.8% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach $1.6 billion (and earnings per share of $0.87) by about July 2028, up from $256.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 33.6x on those 2028 earnings, down from 216.6x today. This future PE is greater than the current PE for the US Multiline Retail industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 1.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Coupang Future Earnings Per Share Growth

Risks

• Coupang is experiencing robust revenue growth across its segments, including an 11% year-over-year increase in consolidated revenue and a 21% increase on a constant currency basis, which suggests that secular tailwinds from e-commerce adoption could continue to generate outsized topline expansion in the years ahead.
  
• The company is rapidly expanding its product selection and investing in signature logistics like Rocket Delivery, with active customers and spend per customer continuing to grow at a high rate-factors that drive higher customer retention and revenue per user.
  
• Fulfillment and Logistics by Coupang (FLC) is growing at multiples faster than the overall business, enabling marketplace sellers to scale more rapidly and supporting margin improvement and third-party revenue streams-key drivers for raising consolidated net margins and earnings longer term.
  
• Investments in automation, operational efficiency, and category expansion (including new markets like Taiwan) are already contributing to margin expansion, as evidenced by a 217 basis point improvement in gross profit margin and expectations of further annual margin gains, signaling improving profitability.
  
• Coupang's $1 billion share repurchase program, along with strong operating and free cash flow generation, demonstrates management confidence and prudent capital allocation, which can directly enhance shareholder returns and potentially support higher earnings per share over time.

Valuation

• The assumed bearish price target for Coupang is $22.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Coupang's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $22.8.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $45.1 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 8.0%.
• Given the current share price of $30.54, the bearish analyst price target of $22.8 is 33.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.