Of all the IPOs from 2021, there’s something about Coupang that makes me want to keep an eye on it. I don’t have a position and admittedly Coupang is not a business I understand enough to own. Some people get confused when I say I don’t “understand” a business — I know what Coupang does, but what I “don’t understand” is what the economics look like in 5 years, and that alone makes it a no-go for me. It doesn’t mean that I can’t get there, and writing posts like these may actually help.
Bom Kim: All the right values
You can tell founder and CEO Bom Kim is heavily influenced by Jeff Bezos. The ideas and values he laid out in the most recent earnings call are eerily similar to what Bezos has been saying all these years.
Jeff Bezos is known for his maniacal focus on the customers. He famously quipped “Obsess over customers, not competitors.” The last sentence, “leaving all to wonder, how did we ever live without Coupang” actually reminds me specifically of what Bezos said in Amazon’s 2015 letter to the shareholders: “We want Prime to be such a good value, you’d be irresponsible not to be a member.”
This is almost identical to what Jeff Bezos said as a response to an interview question:
How do you define what Amazon is today?
We start with the customer and we work backward. We learn whatever skills we need to service the customer. We build whatever technology we need to service the customer. The second thing is, we are inventors, so you won’t see us focusing on “me too” areas.
Interestingly, it’s also what Steve Jobs used to say at Apple. “You've got to start with the customer experience and work backwards”.
Again, this is very similar to what Jeff Bezos and Amazon itself have said about valuing Amazon over the long-term: “Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share.”
This part is actually almost paraphrasing Amazon’s first ever Amazon Shareholder Letter from 1997. Amazon talks about making investments and measuring their effectiveness, aka “iterating rigorously”.
So, while Bom Kim has the right values, I don’t know what to think of the idea that these values are basically recycled and repurposed from Bezos and Amazon. Is it lip service or is it truly internalized within Coupang? It remains to be seen. Ho Nam brilliantly encapsulated this idea on Twitter:
Q2 2021 Results
It’s interesting that even with a good quarter, the market was not impressed and the stock is actually trading at the lowest price since its IPO. Obviously, there are other things at play, including the upcoming lockup expiration (09/07/2021) and a confusing COVID environment with tough comps.
Valuation and general thoughts on Korea
Coupang is now trading at 3x sales, mostly because it is a 1P e-commerce platform with very low gross margins and negative net margins. Gross margins were around 15% in the most recent quarter but would have been a couple of points higher if not for a fulfillment center fire. To their credit, Coupang is investing in and growing its 3P marketplace, a business that would undoubtedly have better end-state economics at maturity.
Coupang also believes that as their 3P marketplace scales, they will have an opportunity to build out their payments business, another potential high-margin business.
So while scaling their 3P marketplace and Fintech business is bullish, the general state of Korea and e-commerce may be less so. First, the population of South Korea is quite small at around 50M people. Secondly, Ecommerce penetration in South Korea is already quite high relative to the rest of the world.
It’s hard to wrap my mind around the idea that the USA is roughly half of South Korea’s e-commerce penetration. Also, despite Korea’s small size, it has the 10th highest GDP in the world at $1.8T. For comparison's sake, Sea Limited is operating in South East Asia, a space with a combined population of more than 600M people and a combined GDP of $4T.
So while Coupang has some things going for it, it will need to find a way to expand outside of South Korea to prolong its growth. Whether they are able to do it remains to be seen. In the meantime, I will keep watching it.