Eco-Bag Initiative And Marketplace Expansion Drive Profit And Growth Amid Challenges

Key Takeaways

• Coupang's eco-bag initiative and emphasis on marketplace and fulfillment logistics highlight a strategic focus on reducing costs and enhancing revenue through commissions.
  
• Strategic investments in new offerings and markets, alongside operational improvements leveraging AI and automation, are set to drive future growth and profitability.
  
• Aggressive expansion and investments may strain resources, while regulatory fines and increases in operating expenses could negatively impact profitability and margins.

Catalysts

Together with its subsidiaries owns and operates retail business through its mobile applications and Internet websites primarily in South Korea.

• The eco-bag initiative for fresh orders not only reduces packaging costs and environmental impact but also supports profitable free delivery service, impacting net margins positively by reducing operational costs.
  
• Coupang emphasizes the growth of its marketplace and fulfillment and logistics services (FLC), with a significant increase in sellers, which is likely to enhance revenue through commission and fees, positively impacting overall revenue growth.
  
• The strong growth in product commerce active customers, especially the increasing spend of existing customers, suggests the potential for sustained revenue growth as Coupang captures more of the retail spend from its customer base.
  
• Investments in developing offerings like Eats and expansion into new markets like Taiwan are poised to open up new revenue streams and contribute to future growth as these segments mature and scale.
  
• Operational excellence and continuous efforts in improving supply chain management and increasing efficiency, including the use of AI and automation, are expected to further improve gross margins and operational efficiencies, contributing to long-term profitability.

Assumptions

• Analysts are assuming Coupang's revenue will grow by 16.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 4.4% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $0.86) by about September 2027, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.6x on those 2027 earnings, down from 42.3x today. This future PE is greater than the current PE for the US Multiline Retail industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Risks

• The integration and restructuring costs associated with the Farfetch acquisition could potentially strain operational efficiency and financial resources, impacting net margins.
  
• A $121 million administrative fine by the Korea Fair Trade Commission highlights regulatory risks that could lead to unexpected expenses and impact net income.
  
• The aggressive expansion into Taiwan and investments in breaking into new markets might not yield the expected growth or could incur higher operational costs than anticipated, affecting overall profitability.
  
• The significant losses incurred by the developing offerings segment, if continued, could drag down the overall profitability and impede the ability to reach positive adjusted EBITDA margins.
  
• Increases in G&A expenses, partly due to the Farfetch inclusion and investments in technology and infrastructure for scalability, could dilute operating margins if revenue growth does not outpace these increments.

Valuation

• The analysts have a consensus price target of $27.48 for Coupang based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $42.9 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 32.6x, assuming you use a discount rate of 6.7%.
• Given the current share price of $24.81, the analyst's price target of $27.48 is 9.7% higher.
• 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.