Coupang (NYSE:CPNG) is the largest e-commerce business in Korea, but is its comparison to Amazon overdrawn? In this episode of Industry Focus: Consumer Goods, join Motley Fool analyst Asit Sharma and host Emily Flippen as they break down one of the newest digital retail companies on the market.
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This video was recorded on March 16, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, March 16th, and I am your host, Emily Flippen. Today, I am joined by Motley Fool Analyst Asit Sharma, to talk about one of the newest e-commerce businesses on the market today and the largest e-commerce platform in Korea, Coupang. Asit, thanks for joining.
Asit Sharma: Thanks, Emily. I must say, I’ve been a bit cooped up the last several days, so I’m looking forward to talking about Coupang with you. Did I get the pronunciation right?
Flippen: I was about to say, I’m not positive I am pronouncing that correctly. For everybody who is listening, who is familiar with Korean or Coupang, I apologize in advance for what will probably be a series of poor pronunciation, at least on my part over the next 30 minutes or so.
Sharma: Same here.
Flippen: Well, I’m really interested in this business because it’s drawn a lot of attention based on similarities to Amazon. Whenever I hear the Amazon of _____ or the Shopify of _____, I think as an investor, my natural skepticism kicks in. But in this case, it’s really interesting to see the huge amount of business overlap between what Coupang has created since it was founded in 2013 versus what Amazon has created today. I think if you take away Amazon Web Services, if you just look at the core Amazon consumer-facing platform, as well as the logistics and delivery network that Amazon has built out, you actually get a business that’s really similar to what Coupang has today. Granted not a one-for-one comparison, but I’ll say you’ll probably get 80% of the way through this business if you just draw that Amazon comparison.
Sharma: Sure. Emily, they’re both these massive e-commerce platforms that are dominant in their respective geographic regions. Amazon has North America, of course, it’s expanded into other geographies. Coupang just focuses on the South Korean market. But man, is it a giant in that space. I think there are a lot of similarities. Like you, I get skeptical when I hear these types of comparisons. But at the same time, my antennae also go up because I want to see, could this be Amazon-like in terms of stock appreciation? The other thing, before you really plunge into the details, that I’m so interested in, is how this company decided to be like Amazon, to build like Amazon but to consider the unique characteristics that are in the South Korean markets. It is a different beast and then they have tailored it so to be unique to this market and that’s pretty exciting.
Flippen: You actually sent along an article to me that was forwarded to you by one of our coworkers about Coupang that was a little less than favorable on the business. It was short, just acknowledging how the comparison against Amazon is, what they called a “flawed comparison.” I won’t spend too much time right now talking about it. If we have some time at the end of the show, maybe I’ll indulge myself a little bit. But if I had it my way, how I would describe this business is almost maybe more like a JD.com for investors who are familiar with the JD platform. Even combining aspects of Amazon and Shopify in there. Similar to JD, which is a Chinese e-commerce platform, Coupang has differentiated itself by owning its entire logistics and delivery system. They have fulfillment offerings, not dissimilar to Amazon Fulfillment. They also have storefronts that they provide for businesses, which isn’t dissimilar to say, a Shopify. Lots of integration here on the e-commerce side. But what is different about Coupang versus the other players in Korean e-commerce is that they own their own inventory for the most part. That means that they have inventory sitting on their balance sheets. They have responsibility for pushing that through. But it also means, since they directly negotiate with the manufacturers of these items, that they’re able, for the most part, to get lower prices on a lot of these goods and move them extremely quickly. Having 70% of Koreans living within seven miles of the Coupang logistics center means that Coupang, in the Korean market at least, is able to quickly surpass the delivery speed of many of its competitors.
Sharma: Yes. Emily, so many points about just these initial thoughts comparing it to JD, and Amazon, and Shopify. The first is that this is a really, really tech forward company. They extract a ton of data from their customers. In many cases, they can work with manufacturers to produce items that they know are going to sell. Then, as you said, they own that whole supply chain, they own the product. The other thing that’s very interesting about being within seven miles of 70% of Koreans is simply that this is a different type of delivery structure than Amazon, which can’t approximate the same proximity to customers because the U.S. is such a large country, South Korea is a fraction of the size of the U.S., and having built this supply chain to customers first, they really are in the driver’s seat.
They’ve invested billions into these logistics centers. Seven miles, if you think about it, is an old school business model. What I mean by that is, we’ve seen this before in the U.S. economy in the 1920’s through the 1960’s, we had the idea of creameries. There’s one downtown near I live, that the building is still there, at least out to other things. But for those of you who live in my state, you probably know this name, the Pine State Creamery. The idea was to have a creamery that was within seven to ten miles of families. You put one in a downtown and you might have a smaller creamery nearby so that you could deliver milk every day. This goes back to that, except it’s not just milk, and they have a very strong grocery component. It also enables them to have something that is even faster than we have in the States, which is a dawn delivery. If you placed an order by midnight, you’ll have it at dawn. Very incredible rethinking of the Amazon business model. As I said before, to make specific to the South Korean market.
Flippen: I say this all the time, but I truly mean it with this one in particular. Read through the S-1 if you’re interested in this business, because the way management talks about the market opportunity in Korea is really unique and it gives you a good sense about how the Korean market is really different than that of the United States, especially if you’re an American investor. One of the aspects that they spend a lot of time on, is talking about a busy Korean lifestyle that doesn’t lend itself to things like in-store shopping as readily as it does in the United States. If you look at things like mobile phone penetration, where 96% of Koreans use a smartphone, 40% of Koreans order groceries online, it gets at a bigger market opportunity than you may assume. If you’re looking at the market from an outside perspective, it’s a very technology-enabled, very busy lifestyle for which Coupang has invented, I guess you could say, an easier way to get necessary chores done.
I guess that’s what Coupang notes as its mission statement, their mission statement is, word for word, “To create a world where customers wonder, how did I ever live without Coupang?” and I love that mission statement, because that’s the number one value that they’re adding to their customers, which is just saving them time in their everyday lives. They have a lot of testimonials from customers about how they use their different services. Despite the comparisons to Amazon when it was eight years in, one of the big differentiations about Coupang being around eight years into their business is how integrated their offering is to improve the lives of Koreans that use this service. They have Coupang Eats, not dissimilar to Grubhub or Uber Eats. They have grocery delivery, as you noted, and even an integrated payment processor. All of these things that took Amazon much longer to build out, admittedly, were a little before their time there, Coupang has already integrated that into the platform.
Sharma: Yeah, Emily. Almost, endless you think, “How I my getting through the day without Coupang?” There’s another element too that strikes me as investable or making consumers want to invest in the company. I worry a lot about the carbon footprint of services like Amazon, so I’m a subscriber to Prime. I know tons of people who are, but you wonder about all the carbon emissions that are perhaps rising and not being offset with this fleet of trucks on the road, almost every time or the highway, you see Amazon trucks. This company really thought through being more environmentally friendly and one of the things that bothered the founders was all the cardboard that comes from an e-commerce business. They have reduced the amount of cardboard that’s used, and they actually have biodegradable packaging, these are bags that they deliver a lot of the products in, without any other wrapping on there. If you read through their S-1, I think there’s a bottle of laundry detergent within this really thin looking biodegradable bag and you can return the bags.
You can return products without any packaging but the bag, and in fact, this goes back to the way they’ve envisioned the technology for a very sophisticated consumer. I should say that among world economies, some of the most sophisticated users of technology are the South Koreans and the Japanese. They probably are just always a step ahead of everyone, I would say, including the Chinese, Emily might have other opinions on that having lived there. But you are able to process a return using their app without any other pruning out of a barcode, or dropping it off somewhere. You just put in the information in the app and leave it outside your door and the same driver network picks it up the same day or the next day. I found that very intriguing as well, because over the long term, what you’re trying to do is to show benefits of a slightly different business model then the JDs and Amazons of the world. I think environmentally friendly parts of their culture could be big for investors over the long run.
Flippen: Yeah, I could talk your ear off a little bit about how the mobile market has changed, especially in Asia. Because countries, especially areas like the United States, got the Internet, we’re all very cautious about accessing it on our computers. Versus when you look at the developing economies, China being a good example. Consumers became much more adaptable, much more willing to use things like mobile phones in a way that even I myself as a 26-year-old and unwilling to do stuff on my phone, prefer to do it on my computer. But if within itself, just looking at the Korean market, the penetration as a percentage of the population as a whole of internet of mobile phones, it’s much higher than you may assume if you’re just trying to compare against the U.S. market. So very different populations, and structures, and willingness to use technology, which is always worth considering when looking at a foreign business.
What is interesting is one of the things that Coupang has, again, taking a lesson from Amazon, has started to roll out, which is a premium subscription service. You mentioned that extremely fast overnight delivery, quickness of delivery that is unmatched by even the Amazons of the world. That comes as part of a premium subscription service that costs $2.50 a month per user. People pay as part of a subscription to gain access to these benefits like free returns and no minimum delivery, those benefits, all the benefits you would assume come alongside something like Amazon Prime. When you look at their user base they have around 14 million active customers. People who are using the Coupang platform, around 4.2 million of those are subscribed paying customers, people who are paying that $2.50 a month delivery or subscription fee. Considering the 48 million active users in China, you can say Coupang has around 30% of all Internet users already using their platform in one form or another, and is the largest delivery platform in Korea at an estimated 25% market share. Pretty large business in terms of total penetration in the Korean market.
Sharma: If you think about that penetration and the natural follow-up question is, can it grow? This is something that’s harder to visualize if you’re not in touch with the South Korean economy, which I’m no expert on. But I did pull up some statistics from a site called Trading Economics, which is a really great site, if you’re interested in understanding how different countries are growing over time; their total aggregate discretionary income, this is the income that the country as a whole has, if you take all the discretionary income that consumers have together, just lump it altogether, that has tripled since the year 2000 and more than tripled. To put this in U.S. dollar terms to about $1.7 trillion today. This is a country that is realizing now the benefits of a lot of investment in technology. Companies like Samsung have brought a lot of technology and distributed it into the wider world, but South Koreans benefit from their very fierce investment in innovation through rising personal incomes. This is a company, when we talk about Coupang, that’s going to reap the harvest of this personal discretionary income, just growing.
If you look at the way the various forecasts have chartered out, it’s going to grow. Personal incomes are going to rise at an annualized rate of about 3% every year, and that’s tremendous, because that’s more than the rate of inflation in the country. There’s this locked in consumer, Emily, with a supply chain that is going to be very difficult for any one now, and a logistics supply chain to replicate. I see an opportunity that’s only going to grow over time. Now, is it going to become Amazon-like in its stock returns, we may be getting a little bit ahead of ourselves here. I don’t know. The company has a limited market, but that market is huge. The stock can do quite well. We’ll get to this a little bit later in the conversation, but I am intrigued at the way it’s been able to really penetrate into the South Korean consumption economy in such a short amount of time.
Flippen: I have to admit, that was probably, and to an extent still is, my biggest concern when hearing about in researching Coupang was. Just how big of a market opportunity do they really have, they are already so highly penetrated within the Korean markets, and they are very focused on South Korea right now. This isn’t a business that is rapidly expanding to other areas across Eastern Asia, Southeast Asia, but Korea is the fourth largest economy in Asia and the 12th largest in the world. I was surprised to find that they did over $130 billion in e-commerce sales in 2019, and that’s expected to grow at 10% CAGR. We can argue valuation all day, and I think I will try to make that Amazon argument in comparison later in this show. But just from the business itself, there’s really not much anybody can say that’s negative against the concept in the skills and actual application of what Coupang is doing today. Does that justify today’s valuation? I don’t know. We’ll get there. But just to base off the opportunity in Korea, it’s a very legitimate and growing opportunity.
Sharma: Sure. There’s another way to look at this; in terms of that market opportunity is the system that they’ve built, the supply chain, it’s interesting because there was no delivery service like UPS or FedEx in the country, no big logistics distributor before Coupang. I was so surprised by that. Their delivering network, which is so large, this is a cellphone fleet of trucks, is actually one in which they employ their drivers full-time and they offer them benefits. They’re taking the market even for truck drivers. [laughs] Every angle that I tried to […] this and Amazon come in and build out also all these logistics centers so that they’re within seven miles of every customer. You’d also have to pay your drivers on a different model than almost any other e-commerce country in the world. So, some of what they are doing now, which may look like drag on the income statement, is actually making it difficult for another company to come in and challenge. Maybe they have an easier path to getting more and more of that market share. If we look beyond five years or 10 years, I know when we were trading some notes, I was thinking, man, if you’re looking out 10 or 15 years, this could be a very interesting opportunity. They may have time to grow into what looks like, at first blush, a pricey valuation after this IPO.
Flippen: I like how you’ve mentioned they’re employing drivers that it gets out what is probably the biggest issue, at least in financial media that Coupang, has been rated over the course for which is their labor practices. One of the issues that was highlighted in the Financial Times article you send along to me. The argument is essentially that Coupang, alongside most delivery services in Korea, not too dissimilar to the problems that we’ve had here in the U.S., overworked individuals that are underpaid and used as contract delivery people, and Coupang, as one of the largest employers in Korea, is at the center of this social and economic issue in the country. Last year, there was an issue of one of two Coupang employees who passed away over the last year. One after working a 62-hour week, something that Coupang says they do not encourage, do not allow. But Coupang is still right there in the center. I do feel like it’s worth pointing out some of the big moves that management has made prior to going public to counteract some of these issues.
First of all, as compared against many of its other Korean delivery counterparts, over that same time period that we saw these two workers die in Korea, there were 17 other deaths of different couriers at different services, mostly working 90 hours a week on commissions, not full-time employees over that same time period. Coupang ensures it’s their policy. So, we only know what they are telling us. But their policy is that workers do not work more than five days a week and they do not work more than 52 hours per week. They also classify all their delivery drivers as full-time employees, which gives them full benefits, so they’re not contract workers. Part of those benefits are actually stock options as part of this IPO process. So, based on what I read and what I’m seeing, I feel like they are trying their best to deal with the culture issue that is coming out about the working requirements that it takes to have a business this large, becoming the largest delivery provider in Korea. So it’s definitely a risk, it’s definitely worth noting. But in my opinion, it’s somewhat mitigated by the steps that they’ve taken to decrease hours and ensure better working conditions.
Sharma: Yeah, I think so. You have to also understand that the company started out with more of a delivery structure. So, they have all these employed truck drivers and they have their own unique trucks that have been optimized for local delivery. Then they entered the daily delivery game, which I think is most characterized by Coupang Eats. And that’s where they have the subcontracted drivers. That is a competitive space, and I think that they found that it is difficult. If you hire subcontractors, they are going to work. It’s not a high-margin business. If you are the subcontractor in any delivery service, we see that here in the U.S. with so many third party delivery aggregators, that’s a tough business to be in if you’re freelancing, and sometimes to pay the bills, people have to work ungodly hours. I think that had a wake-up call with those incidents and they want to try to make that part of the business a little more holistic, a little more similar, as much as they can be, to the grocery delivery business, the truck driving business, in which they employ workers full-time and have these policies that you’re talking about.
How they do that economically, I don’t know, that’s a business risk. But I think we can look at the company’s early history and see a commitment on management’s part to treating workers fairly. But as for the subcontracted part, that is a risk for every delivery-type company in the world that is using third parties to pick up stuff from restaurants and take it to a consumer. This is something that you utilize the business model because it’s efficient. But ultimately, it is up to the driver. I have been on Industry Focus very skeptical [laughs] of food delivery, restaurant delivery. So to me that’s not the greatest business to be in, but for them because, again, this is a compressed company, a country with really dense cities, it is a sustainable business model in the long term. It’s just getting it right, so that there is a humane balance for the freelancers who are taking these deliveries for them to be able to earn a decent living without risking their lives.
Flippen: Definitely a great point to make. Before we come on a bit to some of the risks of this investment, you talked a lot about some key risks. I think it’s worth mentioning their financial performance. It’s probably easy for a lot of people to draw some conclusions about how their performance may have been over the past year as a result of the pandemic, and it’s very much the case that Coupang had a pretty stellar year in 2020, they had 90% net revenue growth to nearly $12 billion. Their net loss or operating income losses should say, to $500 million. So still losing money, but one of the things that really stood out to me as something I liked to see in terms of financial performance, is actually how management talked about their financial goals, and their explicit financial goal is to increase free cash flow with limited shareholder dilution. If you look at the business’s free cash flow, it’s actually been decreasing, the loss of free cash flow has been decreasing every single year to the point where they’ve almost broken even in terms of free cash flow. That was really a vital aspect of self growth for Amazon, was the ability to generate large amounts of cash. So it’s good to see that Coupang is taking that same direction with its business. They’re aware of what they need to do to generate growth in the future without making it extremely dilutive to shareholders, and that is increasing its free cash flow.
Sharma: I think that they have a pretty clear path to increasing that free cash flow. One of the things that is easy to miss about this business is that free cash flow was consumed in early years by this build-out of their logistics centers. But that’s on the early investors. Those are the people that came in and funded this company. They built the infrastructure and now they’re benefiting by a publicly traded company, they’ve got shares. So a lot of that investment now just has to be maintained. Now, that’s capital intensive too, maintaining the trucks, maintaining the logistics centers, building out more, constantly optimizing your supply chain operation, that’s all capital intensive, but the heavy lifting is done. That’s in the book. So, you have a path to free cash flow and you can measure it. If you take a look at, I’m looking at their absolute gross profit as we’re talking for the last three years, so they had $12 million in revenues in the last year, that is the year ended December 31st, 2020, and that almost tripled from 2018.
If you look at their cost of sales, their cost of sales did just under a triple, and they’ve been able to maintain this little bit of operating leverage there. Their absolute gross profit is going to start growing. I think that their fixed expenses, fixed expenses of $2.5 billion in 2020 versus that $12 million of sales, that’s a pretty good ratio for an e-commerce company. Of course, Emily, I think you put your finger on it. We don’t know how much of last year is due to this really big jump during COVID. But overtime, this company can be a little bit more Amazon-like, and probably better. I would think they might have better operating margins than Amazon or Amazon’s, let’s call it Amazon’s e-commerce business. Forget AWS and all the other portions of Amazon we look at, simply because of the density of South Korea. This is something that, again, I think may be a loss for some investors; over the long term, if you’ve got a network that’s all closer together, in other words, if you’ve got a density and logistics centers that surround that city and are located within it, you have fewer touches for each piece of inventory that you’re moving. This over the long term translates into operating margin points. I really like that about Coupang.
The other couple of things that I guess we should mention pertain to the balance sheet. Balance sheet is fairly strong, but they do have a big jump in their accounts payable in the last year. In fact, it’s more than you would expect if you just looked at how inventory rose over the last year, so they had this big burst, as everyone did, with COVID. Emily, that inventory between 2019 and 2020 went from $631 million to about $1.2 billion. Their accounts payable jumped from $1.6 billion to almost $3 billion, so more than you would expect from that $600-million odd jump in inventory. But I think what they’re doing here [laughs] is a little bit of window dressing before an IPO, because they were able to keep cash on the balance sheet. It looked really good, it was $1.2 billion. I believe this is not anything to worry about if anyone’s read the S-1 and wondered, why did their working capital deteriorate so rapidly over the past year? We also have to remember that they raise, what, $4 billion-odd in this IPO. So they’re flushed with cash. They’ve got plenty of cash, I think, for further investments and maybe to make some strategic acquisitions. Was there anything else that you saw in there that concerned you in the financials?
Flippen: I can argue this is financially related. I’m starting to think I’m an over demanding analyst. [laughs] I guess I got spoiled businesses like Chewy, broke them out, but we’re increasingly seeing maybe a reluctance to break these numbers out. But they didn’t give me as much color, on things like customer acquisition costs, as I really wanted coming into this. They noted that customer retention for those premium members was vital for fueling growth in the future, but didn’t give any color about what the life cycle of these customers look like. The closest we got was a breakdown of spend by cohorts. They took the 2016 cohort, 2017 all the way up to 2019 cohorts, and indexed their spend starting from year one. In 2016, year one, obviously, one is the index there. You spent $100 on the platform, that’s how much your spend was for year one. They track how that grew year-over-year. By year five, for the 2016 cohort, they are spending on average around 3.6 times as much money as they were spending in year one. If that customer spent $100, they would’ve spent $360 in year five. That actually has been increasing. Spend by cohort over time, each cohort they bring in is spending more and more on a more rapid pace. Which is great, but we don’t really have any sense about how big those cohorts are, how many people actually flow through it.
It is interesting to see, one of the risks that I noted was the acquisition of customers. In 2019, active customers rose 34%. That’s great. That’s what I would expect. That must be great for 2020 then. I think with 34% in 2019, 2020 must have been stellar. But active customers only grew 18% in 2020, and they provided zero color about why active customer growth slowed nearly in half year-over-year, during the time period when I guess I would have expected it to grow. Maybe I’m missing something in the picture, maybe I should be able to draw some conclusions there that I’m just simply overlooking. But that was one of the big questions I had still lingering over my head coming out of this S-1.
Sharma: That’s bothered me too. I didn’t pick that up until you pointed out in the notes, but I was thinking about that and wondering what’s happened in South Korea on a macroeconomic level. Was there a lot of stimulus during 2020? How did people react to being confined indoors? Maybe it was a situation where you really didn’t switch from your current provider. We should say that Coupang has some competitors, they’re just much smaller and they’re local. They don’t have any kind of dominant platform like an Amazon that’s a No. 2 in the country. The other thing that would’ve been nice to know, Emily, is the composition of that cohort growth. Because if you look at what happened in the U.S., Amazon, when it really started to flourish, people were ordering smaller and smaller items. This is that model on steroids, because if you become an oil Coupang customer, then you might not be using it a few times a year just to make bigger ticket purchases or really cool purchases that you can’t physically get to. You’re using it every day, but increasingly you may just be buying a few groceries and using it for incidental items.
While the frequency will push up your total spend, the margin on all of that may decrease, because you are buying stuff that’s very small, because you’ve paid for the service. I’m not saying that I’ve ever done this, but I can easily see someone just buying one item for delivery in the morning and doing that day after day, after day. Now I need a tube of toothpaste, I’m going to order that. Overtime that can hurt the operating margin of a business like this. It would be nice in future quarters to see the breakout of that spend. I’m not sure we’ll get it. They’re not obligated to provide it, but it’s something I wonder. Of course, you can always track gross profit and operating margin just from the topline numbers every quarter and get a sense from those big aggregate numbers.
Flippen: That’s a really good point, I actually didn’t consider that. The only other risk I noted was just the competition in this space. I still have these lingering questions about how much this business can truly grow. Well, an amazing opportunity in a much larger market than I initially gave it credit for, it’s still just the Korean market. What levers can they pull that would make them more Amazon-like? Amazon Web Services changed the game for Amazon on a scale that no investor could’ve predicted. I’m left with this question about what Coupang can do that would change the game that I can’t predict right now today. It’s magical, because I can’t know what it is, right? [laughs] By definition, it’s unpredictable. But as I sit here racking my brain, I just don’t see anything obvious for them to pivot into in the future that could really just fuel growth the way that we’ve seen Amazon fuel 20% topline growth for the past two decades. It’s truly outstanding.
Sharma: Yeah. I’m not sure that they’re going to have a killer app. [laughs] Think of it in these terms that Amazon Web Services, Amazon Web Services was the killer app for the company. Of course, Amazon Web Services is a cloud-based service. It’s not an app. But to use a rough analogy, I’m not sure it’s going to have this one killer piece of business that’s going to come along and support cash flow and allow the company to experiment and to have just this wonderful supported free cash flow that supplements the e-commerce business. But I do think that they are ahead of most other e-commerce platforms. I’ve looked at, I’ve got an […]. I think that their tech is more advanced than any platform I’ve looked at. I have not looked at some of the Chinese platforms as much as you have, Emily, so they may exceed it. But in terms of collecting data on customers, how they’re using that data to optimize their efficiency and delivery, to offer products to customers, to develop products based on customer data, I think that’s a really strong bit of intellectual property that they will be able to grow and expand over time. Now, what kind of optionality does that result in? I’m not sure, but they are forming this really, really tight relationship with the South Korean customer.
I think their mission statement rings true for a lot of their customers who probably can’t remember what life was like before Coupang. So, somewhere in there is a future business. You can already see Coupang Wats as the first extension of that. We’re good at delivery, and they talked about in their S-1 how they take some of the principles from their normal grocery and consumables delivery, that knowledge and transfer it to the sort of contracted business to compete in the food delivery space. I can see them testing new business lines over time and becoming something more than just a company that’s focused on this back and forth e-commerce with customers.
We know that South Korea is one of the most innovative countries in the world in terms of developing new products, and I think it’s a fertile place to be. You’re in proximity to a lot of great companies that you can either acquire or partner up with. So I think they’ve got, again, a really great path to it. Off the top of my head, I couldn’t define it for you, but I think that optionality is there. Now is the best time to talk about they are an $80 billion company at this point in time, with about $12 billion in sales, are they going to be like Amazon and return thousands upon thousands of percent to customers? I don’t know. But could this be an $800 billion company? Could it across the $1 trillion or $2 trillion mark over the next 15 years? Given the market opportunity that’s just there in South Korea, I think that’s doable for this company. They will have to keep that dominant market position and fend off any new entrants. But they’ve done the heavy lifting with that logistics network that’s so robust at this point in time, I actually can’t see how another company comes and challenges them for No. 1 space. Amazon, or another competitor could come in and grab the No. 2 spot. What are your thoughts on the ability of this company to grow into a larger valuation from $80 billion to several hundred billion or more?
Flippen: I think I can provide some color on that in relationship to how Amazon looked eight years after its founding. That article you sent around said that drawing the comparison between Coupang and Amazon was a flawed methodology because of issues of cash flow. They noted that Amazon turned free cash flow eight years into its founding, whereas Coupang was founded in 2013. It really started its operations in 2013. But it’s still not yet free cash flow positive, meaning they’re funding growth with outside capital. They also said that it’s not a fair comparison because Amazon has nearly 50% of the e-commerce market in the U.S. versus Coupang’s only 25%. I really, I was triggered by this article. If you had asked me the question before reading this article, I maybe would have expressed some skepticism about its ability to grow into hundreds and hundreds of billions of dollars business from where it is today, right? […] triple 5X. But I’m actually a little bit more bullish after digging into these numbers more. So my skepticism from reading this article made me want to dive into the numbers deeper, because clearly this article is kind of misrepresenting the financial position of these two businesses.
So, if we were wind to 2002 and we look at Amazon back in 2002, Amazon had done $100 million in levered free cash flow, pretty outstanding. They also did $174 million in operating cash flows and spent $39 million in capital expenditures. So naturally, free cash flow positive. But they also had billions of dollars in long term debt, I think over $2.2 billion of long term debt at the end of that year, and had only done $3.1 billion in sales. It was actually losing money in terms of operating income. So despite generating a lot of cash, the income statement looked a little bit worse. At the time, taking an average stock price at Amazon over the course of 2002, looking at financial performance over 2001, it traded an average price to sales around four times during this year. If we compare that to Coupang as it exists today, Coupang did negative $200 million of free cash flow, so significantly less free cash flow. But it made $300 million in operating cash flow, nearly doubled that of Amazon and spent nearly $500 million in capital expenditures. So, this is getting back to what you were noting about the strategy of Coupang versus Amazon, Coupang came into a market much later than Amazon has, invested millions and millions of dollars, hundreds of millions of dollars into building out technology and infrastructure and logistics that are unmatched by even the likes of Amazon today, and that’s extremely expensive.
Despite the fact that they’re generating operating cash flow, they’re reinvesting a lot of that money into their business, which is generating this negative free cash flow. The end results of that is actually astounding growth rates in a way that we didn’t see with Amazon back in 2002. It’s easy to look at the price to sales ratio today and say, oh, well Coupang trades at a price to sales of nearly double that of Amazon. When you just look at eight years into the businesses themselves. But when you consider the fact that Amazon is growing about 20% over this time period versus 90% for Coupang, on a relative basis, Coupang actually looks cheaper than Amazon did in 2002. Even if you back out the sales as they had in 2020, because 2020 was a weird year, Coupang still grew 55% in 2019. So even if you look back, pre-Covid, Coupang is still on a relative basis to Amazon in 2002. Looks cheaper just based on those metrics. So I’m not sure about things like labor practices, I’m not sure about the total addressable market if that caps out somewhere. But in terms of thinking about its viability as an Amazon-esque business in Korea, yes, I totally believe that this business can become a multi-hundred-billion-dollar business at some point in the future.
Sharma: Yes. Well said Emily. The other thing is that, again, it’s easy just to align these companies up and look at a few metrics, as you said, look at the relative difference in price to sales ratio, and just think that Coupang doesn’t have the potential of Amazon. But if you compare apples-to-apples of where they were in different stages, today, this company has what they term, a selection of millions of items across all of their goods categories. They call it from tomatoes to TV, deliverable for the next day, every day. This is the largest SKU count for owned inventory products of any e-commerce site in South Korea. But they also have the largest total SKU count, which extends into the millions for owned inventory plus third party products on their e-commerce site. We actually haven’t even talked about this angle that Amazon doesn’t have, which is I think almost more of a Shopify-type experience. I think you mentioned it for merchants. So there is a whole set of this business, which is their millions of items of inventory they owned, plus millions of items for the third party shops that they sponsor.
Going back to their technology, they actually share their data analysis and machine learning, with small merchants, to help them have their products seen in this never ending marketplace of goods. This is something I think that’s even more advanced than maybe what T-mall merchants have in China. So there’s all kinds of things about the switch point to the ability to get more and more market share over the years. With more market share comes an extension in sales, comes operating leverage, and then you can start looking at this company times it’s free cash flow in a few years. I may be misstating here, but I remember taking a look at what Amazon has traded in terms of its free cash flow over the last 10 years. I think I did this exercise a couple of months ago. I’ll go back and check them. I’m reasonably comfortable saying this, but historically, 40 or 50 times free cash flow, so if you can envision this as a company then the next 15 years goes from $12 billion in sales to — let’s say it can double or triple those sales — and then generate appreciable cash flow, multiply that cash flow out 40 times, and you get a company that’s worth in the hundreds of billions.
If you hold this company for 20 years, remember, best-in-breed companies like Amazon, Microsoft, Apple, and you can look at other examples around the world, these are companies that last in the decades, then you’ve got a really great long term investment, not without its risks, which I think you’ve done a good point talking us through the day, but one that, man, I just can’t see a lot of opportunities like this around the world. We’ve got this really great infrastructure in a country which has one of the fastest-growing per capita discretionary income slices of all developed countries in the world. It’s intriguing.
Flippen: It really is. I can’t wait to see where this one goes in the future. It’ll be interesting, again, if you’re interested in this business, considering a lockup period, as I mentioned, there’s a lot of external shareholders, employees aatt both professionals of a firm lockup period’s coming up. So always, be cautious with IPOs and jumping in immediately. I tend to let things, we’ve talked about this so many times, I won’t harp on about it. But I tend to let IPOs sit for a bit. If Coupang is a great opportunity, I promise you, it’s a great opportunity a month from now, three months from now, a year from now, so don’t get that sense of FOMO, clearly Asit and I are fans of this business today, but for Coupang to win it has to win for a long time, not just tomorrow. But Asit, as always, thank you so much for joining me and listening to me drone on about that Financial Times article. I appreciate the indulgence.
Sharma: Well, you know Emily, No 1, like some of our listeners, I could listen to you all day, and No. 2, that is always good to have an article like that to stress test your thesis. I think you did a great job with it.
Flippen: Fools, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say “Hey,” shoot us an email at firstname.lastname@example.org or tweet at us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I’m Emily Flippen. Thanks for listening and Fool on!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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