We have lowered our target price for Coupang from US$50 to US$28 in line with lower valuations for EM e-commerce overall. The Nasdaq's decline this year has taken a heavy toll on speculative tech stocks, with Coupang down 38% since 1 January.
We have raised the WACC in our DCF-based valuation from 5.51% to 8.26% and have reduced the beta from 1x to 0.77x to reflect a comparatively lower level of risk in light of the Nasdaq sell-off.
We maintain our earnings forecast and are still bullish on the company ahead of the release of its results on 12 March, although we are 4% and 5% below consensus on EBITDA and revenue for FY 22, respectively. We expect EBITDA profitability in FY 24.
In our opinion, Coupang's operations are on a solid footing:
There have been fears of a crackdown on Tech in South Korea, along the lines of China's regulatory scrutiny, but these fears are unfounded. The Korea Fair Trade Commission, South Korea's regulator, has stated that it would intervene in the tech market only in the case of anti-competitive behaviour.
There was a fire at one of Coupang's fulfillment centres in June and this raised fears that the company's operations – and its high-efficiency standards – could come under strain, exacerbating the impact of Covid. However, we think this is now reflected in the stock price. Moreover, Coupang recognised an inventory write-off of US$158mn in Q2 as well as US$138mn in asset write-offs. If one strips out the impact of the fire, gross profit rose 86% yoy to US$816mn in the quarter, suggesting that Coupang's frenetic revenue growth could translate into profitability.
There are, though, concerns that Coupang's pace of revenue growth is unsustainable. The firm's FY 21 revenue is projected to be 174% higher than in FY 19 – this is the highest rate among the so-called 'Baby Amazons' (EM e-commerce leaders). We expect Coupang to continue to generate high revenue growth through its foray into food delivery, which is the next stage of development for the company, mirroring the trajectory of other Baby Amazons, such as Alibaba and Jumia. For example, Coupang is investing heavily in Rocket Fresh (which ensures delivery of fresh food within seven hours of ordering) as part of the Coupang Eats food delivery service.
We value Coupang on a DCF basis.
Coupang is cheap on a comparative basis versus other EM e-commerce players.
Coupang initiation: Korea's e-commerce champion can 'Rocket' (September 2021)