Coupang Shows Once Again Why It Is the Best E-Commerce Stock to Own Right Now

E-commerce is one of the best hunting grounds for potential long-term investments, partly because it is still a relatively young and growing industry. Out of Amazon to Mercadolibre to Shopifymany long-term stock winners come from online trading. But while all three e-commerce stocks should thrive this decade, investors should be on the lookout for other potential winners to add to their portfolios.

Enter coupang (CPNG 0.91%). The online retailer operates a similar playbook to Amazon, but in South Korea, and is quickly gaining market share in the country.

Coupang just reported another solid financial result for the second quarter of this year. That’s why it’s my favorite e-commerce stock right now.

Coupang posted revenue growth and margin expansion in the second quarter

Coupang reported gains after the market close on Aug. 10. Revenue increased 27% year over year on a constant currency basis (excluding the appreciation of the South Korean won against the US dollar) to $5 billion. That compares to the broad South Korean e-commerce market, which grew just 6% year over year in the quarter. That tells me Coupang continues to gain market share among e-commerce shoppers in its home country, which it’s done every quarter since its IPO in 2021.

Perhaps even more impressive was Coupang’s margin expansion during the quarter. E-commerce is notoriously a tough business to crack, and Coupang has been no exception, with gross margins running low (especially during the pandemic). In the second quarter, gross margin increased 250 basis points from the first quarter due to continued scaling and the growth of higher-margin offerings like marketplace advertising. The company’s gross margin was 23% in the second quarter, resulting in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $66 million.

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With this margin expansion, management updated its full-year adjusted EBITDA guidance to positive, rather than the previously expected $400 million loss. This is a great sign that Coupang’s overall strategy is working.

Coupang has long-term goals and market opportunities

Coupang is pursuing a strategy similar to that of Amazon. It has a wide variety of products (both owned and third-party) on its marketplace, a premium subscription service for fast shipping, its own logistics and delivery network, and an advertising segment. With this model, Coupang believes it can gain further market share in e-commerce in South Korea. By 2025, the e-commerce industry is expected to reach $291 billion in the country. With “only” $18.4 billion in sales in 2021, Coupang has a long way to go to gain market share in its home market. This shows me that revenue can continue to grow at a rapid rate for many years to come.

But what about profitability? In its Q4 2021 investor presentation, management had long-term guidance for gross margin of 27% to 32% and adjusted EBITDA margin of 7% to 10%. It’s unclear when those goals will actually be met, but the company continues to make progress, according to recent quarterly results. Based on its 2021 revenue figures, Coupang would have generated Adjusted EBITDA of $1.3 billion had it hit the low end of its long-term guidance.

Coupang’s assessment is correct

As of this writing, Coupang has a market cap of $33 billion. The company has generally not been profitable, which makes valuing the stock difficult, but let’s run through some future scenarios to see what investors are buying right now. If Coupang can continue to gain market share in South Korea and grow sales by 20% per year, sales will reach $38 billion in 2025. At an adjusted EBITDA margin of 7%, that translates to annual earnings of $2.66 billion, or a forward-adjusted price. Earnings ratio (P/E) of 12.6. Coupang will need a lot of work to reach those goals, but I think the stock will do well if it does.

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Is the stock still a bit expensive at the moment? Probably. But with such an immense market opportunity and a proven strategy for gaining market share over its peers, Coupang looks like a great e-commerce stock to own for the long term.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Coupang, Inc. The Motley Fool has positions in and recommends Amazon, Coupang, Inc., MercadoLibre, and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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