Make no mistake: Investing in an initial public offering (IPO) is inherently risky and there are lots of reasons to avoid recently public companies. While there is a certain allure to buying into the next big thing and watching it skyrocket, the reality is often very different…
In fact, in most cases, the only people who get rich from an IPO are private equity investors and the company’s founders. Retail investors almost never get in at the IPO price, particularly if there is strong demand for a stock. Additionally, there is the lack of a significant track record for these nascent companies, adding to the risk for investors.
Every once in a while, however, a recently public company comes along that defies the odds and has all the hallmarks of success. Less than three months after its IPO, I believe that Coupang (NYSE:CPNG) is one such company.
The Amazon of South Korea
Coupang may not be a household name among U.S. investors, but you’d be hard-pressed to find someone in its home of South Korea who doesn’t know the e-commerce giant. The company’s mission has become so integral to the lives of its customers, they’re left to wonder, “How did I ever live without Coupang?”
The company was founded in 2010 and modeled after its North American rival. Coupang copied some of Amazon‘s (NASDAQ:AMZN) most successful features, offering what it calls “Rocket Delivery” — same-day and next-day delivery, made possible by its large and growing fulfillment network. Here’s a telling indicator of its reach: roughly 70% of the South Korean population lives with seven miles of a Coupang logistics center.
The company has gone even further, reimagining the fulfillment process by eliminating cardboard boxes in 75% of deliveries, replacing them with eco-bags that are then collected for reuse after each drop-off. These innovations and many others have helped make Coupang the largest e-commerce provider in Korea.
The country represents a significant opportunity. Korea has the fourth-largest economy in Asia and is the 12th-largest in the world, as of 2019. Total e-commerce spending topped $128 billion in 2019 and is expected to surge to $206 billion by 2024. As the largest product e-commerce company in the country, Coupang is perfectly positioned to capture a large and growing percentage of the continuing shift to online retail.
The numbers tell the tale
Coupang has a remarkable history of revenue growth. For the year which ended December 31, 2020, net revenue of $11.97 billion grew 91% year over year, accelerating from the 55% growth in 2019. This came on the heels of revenue increases of 69% and 44% in 2018 and 2017, respectively. Its impressive growth continued into the first quarter of 2021, with revenue of $4.2 billion, up 74%.
Let’s be clear: Coupang is in high-growth mode, which is reflected in its bottom line. Last year, the company incurred a net loss of $475 million, an improvement from its loss of $699 million in 2019. The red ink continued into this year, with a net loss of $295 million in the first quarter. It’s important to note, however, that the hit to the bottom line includes a charge of $87 million in equity-based compensation, of which $66 million was equity awards related to Coupang’s recent IPO. That number should moderate going forward.
Perhaps more importantly, while the company continues to invest heavily to ensure future growth, its free cash flow (FCF) is edging closer to breakeven, from -$500 million in 2019 to -$200 million in 2020.
It isn’t surprising that the company isn’t yet profitable, given that…
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