Description

-          Dominant E-commerce company in South Korea (the “Amazon of Korea”)

-          Founder/Owner-Operator CEO who is smart, intellectually honest, aware of risks, disciplined, a fantastic operator, and long-term focused

-          Key competitive advantage is sclaed logistics/delivery infrastructure – supports 24-hour or less delivery times

-          Strong growth with long runway – Cohort analysis among the best we’ve seen

-          Nascent grocery delivery (Fresh) and food delivery (Eats) segments

-          Additional new growth vectors: merchant services, international, fintech/payments (Coupang Pay)

-          Backdrop: “Broken” IPO, broad Asian (primarily Chinese) tech stock weakness

Overview

Coupang is the dominant ecommerce company in South Korea - frequently referred to as the “Amazon of South Korea.” Coupang has both a 1P and 3P model (estimated at 60-65% 1P, 35-40% 3P). It has an Amazon Prime-like membership option called Rocket.  Coupang has invested heavily in logistics such that it has the fastest delivery times to the majority of the country. 70% of the population lives within 10 minutes of a Coupang logistics center.  >99% of Rocket orders are delivered within 24 hours.  The company has launched grocery delivery (Fresh) and food delivery (Eats), and has a number of additional shots on goal in merchant services, international (Japan, Taiwan, Singapore), and payments.

Thesis

If Coupang can grow revenue at a 25%+ CAGR over the next five years (which would be a dramatic deceleration from recent rates), it will generate $60bn+ of revenue in 2026.  If at that point it has earnings power of 10% EBITDA margins, it will generate $6bn+ of EBITDA (note, it may still be reinvesting in nascent offerings/businesses, but perhaps we’ll be able to estimate earnings power of the mature business by then).  These growth rates, margin profile, and dominant market position should support strong valuation multiples.  Against this backdrop, the current $45bn EV would appear cheap.  We think $100/sh is possible in our upside case, and we can see shares doubling in a less aggressive case.  We believe risk-reward is attractive and skewed asymmetrically to the upside.

History

Coupang was founded a decade ago, originally as the “Groupon of Korea.”  That said, the company quickly pivoted and by 2013, founder Bom Kim would tell Forbes, “Our model isn’t even close to Groupon.  If anything, we’re closer to Amazon.”

The company went public earlier this year. Initial price talk was $27-30/sh which was raised to $32-34; the IPO ultimately priced at $35.  The stock opened north of $60, traded as high as $67, and has subsequently traded down to its recent price of $28 over the last few months, breaking the $35 IPO price along the way.

 Competitive Advantages

Our growth outlook is predicated on our view of Coupang’s competitive advantages, which have positioned it as the dominant ecommerce company in South Korea.

We believe the company has a number of competitive advantages including its culture, brand, and infrastructure.  The S-1 does a good job of laying these out:

 Our Strengths

We believe the following strengths contribute to our success:

Culture. We have a founder-led culture of fanatical customer centricity that is underpinned by our focus on operational excellence. Below are some of the key leadership principles that define our culture:

•“Wow” the Customer. We exist to transform customers’ lives for the better. The customer is the beginning and the end in every decision we make.

•Ruthless Prioritization. To focus on what we must win, we give up what we want to do. Laser focus requires courage and confidence.

•Aim High and Find a Way. We aim for jaw-dropping results and work backwards. Goals are often set to what seems impossible within existing conditions. We have the courage to aim high and then embrace any change necessary to deliver the “wow.”

•Dive Deep. Operational excellence requires hands-on leadership with a passion for detail. We dig down to the smallest details to gain a full understanding, which equips us to empower the right people and deliver results. No task is beneath us.

•Move with Urgency. Urgency is a sense of crisis. We “learn by doing” and do not delay decisions to seek a “perfect” solution.

•Learn Voraciously. We are hungry for the best ideas and seek them from all sources. We embrace growing pains. Ego is the enemy: we avoid rationalizing mistakes and are vocally self-critical.

•Think Systematically. We build scalable processes with prompt feedback mechanisms. We take measures not only to fix defects, but also to prevent them in the future.

Brand. Our focus on revolutionizing the customer experience has made us the leading e-commerce brand in Korea. Coupang is ranked first in customer satisfaction among Korean e-commerce companies61 and first among e-commerce companies in the number of unique visitors across every age group. Our brand is extending to our new offerings as well. For example, our newest app—Coupang Eats—which was recently named “Best App of the Year” by Google Play and voted the “Most Popular App” in their 2020 survey of Korean users.

Economies of Scale. We benefit from a self-reinforcing virtuous cycle, in which advantages compound with each additional customer and transaction on our network and are reinvested to further drive ecosystem growth. As a result, our differential value proposition grows over time, benefiting everyone in our ecosystem. This is best shown through the following flywheel:

1. As customers learn more about our superior experience, we believe more customers will choose our offerings and existing customers will also spend more and more.

2. Increasing scale will make us not only more compelling to merchants and suppliers, but also generate economies of scale and operating leverage, resulting in increased profits.

3. Increasing profits enables us to invest in efficiency improvements, more compelling offerings, and lower prices, all of which attract more customers and merchants to our ecosystem and increase their engagement.

4. The net result is that we are building a consumer and merchant network that we expect to continue to grow and monetize over time.

Growing Loyal Customer Base. Since our founding, we have witnessed our business improve our customers’ lives. We have consistently increased customer stickiness, order frequency, and spend, even as our customer base has grown significantly at scale. As we continue to add new offerings such as Rocket Fresh, Coupang Eats, and our Rocket WOW membership program, we expect customer loyalty and share of wallet to increase even further.

Scalable, Proprietary, and Integrated Technology. We are a technology-driven company and have invested heavily in developing our own robust and scaled technology that powers every part of the customer experience from our differentiated search and recommendations to fast delivery and frictionless returns. We prioritized building our own technology and utilized the latest in machine learning, artificial intelligence, and other modern tools, as well as invest in engineering talent, to innovate around nearly every aspect of the customer experience. We believe our proprietary technology and capabilities, developed through years of iteration around scaling a unique, end-to-end integrated network, provide enduring competitive advantages that are difficult to replicate.

Nationwide Fulfillment and Last-Mile Delivery Infrastructure. We have the largest B2C logistics footprint as compared to other product e-commerce players in Korea.62 We made a strategic decision to build and operate our own nationwide infrastructure to ensure timely and reliable delivery to our customers and maintain end-to-end control over the customer experience. Over the last seven years, we have added millions of SKUs, developed over 100 fulfillment and logistics centers in over 30 cities, encompassing over 25 million square feet, and delivered billions of products as of December 31, 2020. Through the course of scaling, we have developed insights and invested in a series of systems and processes that continuously improve to lower costs and increase value to our customers. We believe it is hard to replicate, in addition to the physical infrastructure, the combination of insights, processes, systems, and capabilities around complex operations that have developed over years of refinement over various stages of evolution and scale.

Business Extensibility. We will continue to explore new ways to help our customers shop better, eat better, and live better, and to help our merchants improve their businesses and thrive. The technology, infrastructure, and capabilities that we have developed are helping us to expand into new offerings successfully. We have already expanded our core e-commerce offering to food and perishables through our Rocket Fresh offering, on-demand food delivery services through our Coupang Eats offering, and digital financial services through Coupang Pay.

Economies of Scale, Shared – Creating Flywheels

Bom Kim, CEO [1Q 2021 Call]

Our unique investments and growing scale create operational efficiencies, which we can pass on to our customers in the form of lower prices. According to a recent third-party study, Coupang's prices were cheaper on average across all surveyed product categories.

Bom Kim, CEO [1Q 2021 Call]

Historically, online shopping has forced customers to choose between amazing service, low prices and broad selection. Delivery within hours isn't amazing if your selection shrinks to that of a convenience store or if it forces you to pay higher fees or prices. We aim to break these trade-offs. It's only when we deliver all 3 in harmony, amazing service, low prices and broad selection, that we deliver a true wow experience for our customers and sustain long-term growth for the company.

Dominant E-commerce player in South Korea

By most accounts, Coupang is the number one ecommerce player in South Korea. While estimates of the size of the market and Coupang’s market share vary, it seems likely that CPNG is indeed the largest player and its growth is dramatically outpacing a rapidly growing market.

According to Coupang, the Korean ecommerce market grew at a 20% CAGR over the last five years. Euromonitor estimates the size of the Korean ecommerce market at 110bn last year.  In the next two years, Korea will likely become the third largest ecommerce market in the world (after China and the US, surpassing the UK and Japan).

Coupang added $8bn of GMV last year, while the overall ecommerce market grew by less than $20bn.  This implies that Coupang is taking share rapidly, capturing 40% of market growth, on top of its base of market share in the mid-teens.

While overall Korean ecommerce market growth may slow from ~20% to the mid-teens over the next five years, that still implies that the market can double in five years to ~$250bn.

Coupang’s CEO, Bom Kim, has also shared a broader view of the commerce market in Korea (likely including food and grocery delivery, etc) that is twice the retail-only ecommerce market, and growing more rapidly:

“Korea's total commerce market is expected to exceed $530 billion by 2024, and we were still less than 5% of the total market last year.”  - Bom Kim, CEO [1Q 2021 Call]

Regardless of how you slice it, the market is large, growing rapidly, and Coupang is taking share.

Coupang has 4x’d revenues over the last three years and has been growing at 70%+ rates in the last few quarters.

Active customers grew 26% y/y in 2Q 2021 and total net revenues per active customer grew 36%, driving total net revenue growth 71%.

If the Korean ecommerce market doubles in size over the next five years, and Coupang can double its share from the mid-teens to 30% (given continued incremental share of 40%), then it would 4x revenue again over the next five years. This is probably an aggressive estiamte, but even a more conservative view of 25% compounded growth would drive total revenue to $60bn+ by 2026.

 Among the Best Cohort Data We’ve Seen

Coupang’s cohort data shows acceleration in each of the last three years. More recent cohorts are increasing their spending with Coupang faster than previous cohorts while all cohorts continue to grow.

VC Firm Goodwater Capital put this into context of other successful ecommerce companies:

What is Profitability at Scale?

We have attempted to estimate profitability at scale with bottom’s up and top down approaches, triangulating with peer companies. Our best guess is that given density and scale, the model should have reasonable leverage over time. Coupang’s recent gross margin has been around 18%.  It’s former CFO estimates that at scale it should be in the 30-35% range.  Based on this, we think EBITDA margins could eventually be in the low double digits. We realize this is a little hand-wavey, and yet it is an important part of the thesis. If EBITDA margins at scale are low-mid single digits, this is a less attractive story.  Investors will have to come to their own conclusions. 

Whether the company starts printing these kind of margins over the next five or so years is another question; it may continue to reinvest in faster growth or additional new markets/business lines such that reported profitability remains depressed.  That said, we think it will be clear if the core mature business is making progress on this kind of profitability over our investment horizon.  

Capital Allocation

We are impressed with Coupang’s approach to capital allocation.  They seem willing to try things and make a number of “bets,” but also seem willing to follow the data with respect to where to focus and where to back off.  As Bom Kim stated on the last conference call:

"There are many other early-stage initiatives in the portfolio, and I expect that we will not continue all of them. Only the investments whose underlying metrics show strong potential for meaningful cash flows in the future will earn their way to more significant investment. The initial capital for these projects is small, and the real capital investment comes over time as we overcome hurdles and become more confident about future cash flows. It's the same proven disciplined approach we used to build our earlier projects." - Bom Kim, CEO [2Q 2021 Call]

 Risks

There are many risks to the thesis.  Competition is fierce; growth may disappoint; profitability may not materialize; international expansion may not work; valuation multiples may contract. Large holders may continue to sell (see below).  

Cap Table – Post IPO

Softbank: 33%

Greenoaks: 17%

Bom Kim, CEO: 10%

Maverick: 6%

Rose Park: 5%

Softbank recently sold (on 9/14/2021) 57mm shares at an average price of $29.69, and they continue to own 511mm shares.  There is some investor fear that some of these large shareholders with low cost basis may be an overhang.

Catalyst

 - growth

 - margin expansion