On February 12th, South Korea’s largest e-commerce company, Coupang, filed for an Initial Public Offering (IPO) on the New York Stock Exchange (NYSE). The Wall Street Journal has said that this could occur as early as March this year. Coupang’s IPO is likely to be the largest one by a foreign company in the United States since that of Alibaba in 2014, a Chinese e-commerce group, which reached a value of over 230 billion USD after its first day of trading. An employee from Coupang, when briefed on the company’s thinking, stated that the firm is hoping for a market valuation of 50 billion USD following its listing, the Financial Times reports. The lead underwriters, among other financial institutions, for this listing are Goldman Sachs, J.P. Morgan and Allen & Company. According to Pulse News, the company will also allegedly be borrowing 1 billion USD from its syndicate of banks underwriting the listing in order to develop influential connections.
Coupang was founded in 2010 by Harvard graduate Bom Suk Kim. In South Korea, it promises one-day delivery on almost all of its products and can deliver millions of them within hours. On a quarterly basis, Coupang’s revenue increased from 900 million USD in Q1 2018, to 3.8 billion USD in Q4 2020, a growth rate of 322.2%. The extent of this growth is highlighted by the fact that only 0.7% of companies across the world between 1950 and 2015 have delivered a Compound Annual Growth Rate (CAGR) of that magnitude, according to Noah Wilson, an independent investor. This highlights that Coupang has consistently experienced high levels of growth in its revenue over the past few years, indicating that the large amounts of capital gained from its upcoming IPO will drive further growth over the coming years.
Coupang’s major investor is SoftBank, which owns 37% of the company. With money from its Vision Fund, SoftBank purchased a 1 billion USD share of the company in 2015 and a further 2 billion USD share of the company in 2018. With such a renowned investor behind Coupang, perhaps this will add even more encouragement to purchase its stocks in its future listing.
There is however some controversy on whether purchasing shares of Coupang is a sensible investment. Wilson, for example, raises scepticism over the firm’s free cash flow yield. He states that since the company generated free cash flows of 163 million USD in 2020, and it is thought that it will be valued at 50 billion USD after its listing, its free cash flow yield will be 0.33%. This is significantly lower than the average free cash flow yield for the largest 2000 companies in the USA which was 1.0% as of November 2020, according to New Constructs LLC, an investment research company. For this reason, Wilson labels Coupang’s free cash flow yield value as ‘highly unattractive’.
Furthermore, the company is liable to risks concerning the undetected sale of counterfeit items through its website, a problem experienced by several other online retailers such as Amazon. In response to criticism from the New York Times on this issue, Amazon stated on their website that ‘In 2018 alone, we invested over 400 million USD in personnel and tools built on machine learning and data science to protect our customers from fraud and abuse in our stores’. Currently, Coupang is experiencing litigations and disputes due to the damage this has previously caused to its associated brands. For example, the Korea Watch and Clock Industry (KOWIC) stated in November 2020 that Coupang has failed to crack down on the sale of counterfeit watches causing real watchmakers to suffer millions in damages. Moreover, in a press release, KOWIC wrote that the South Korean Law system is only punishing the dealers and suppliers of fake items and not the retailers such as Coupang.
On the other hand, there are arguments to be made for how lucrative Coupang’s stocks could be. According to The Fashion Law, a news company which provides legal and business insights on the fashion industry, a Coupang spokesman said in late 2020 that the firm has about 100 employees whose specific task is to eradicate the trade of fake luxury goods through Coupang’s setup using a high-tech system. Therefore, the firm is proactively making sophisticated efforts to combat fraud issues.
In addition, Coupang’s net losses have been decreasing consistently over the past few years. Indeed, net losses decreased by 56.7% from 1.09 billion USD in 2018 to 475 million USD in 2020. A net loss is when the expenses of a company exceed its total revenue. Although one might regard it as worrying that Coupang has had these net losses over the recent years, they have clearly been decreasing consistently and this will be further aided by the IPO. Furthermore, South Korea is the fourth largest economy in Asia and the twelfth largest economy in the world with a GDP of 1.6 trillion USD. Moreover, the country’s total amount spent in e-commerce was 128 billion USD in 2019 and this is expected to reach 206 billion USD in 2024, Wilson states, which would be a CAGR of 12.2%. Therefore, this shows that Coupang is operating within a large market with large potential for growth. Even if the firm decides not to branch out into different countries with capital raised from the IPO, Coupang has potential for progress and growth within South Korea. Indeed, when filing for an IPO, Coupang stated that it plans to spend a considerable amount of its earnings from the listing on the expansion of distribution centre facilities.
Therefore, there is clearly division in whether or not it is a good choice to invest in Coupang when the e-commerce company is listed. Although the company has experienced significant problems regarding the sale of fraudulent items and has a questionable free cash flow yield, it undoubtedly has potential for much more growth, and it has shown that it is willing to combat counterfeiters. Coupang appears to be a worthy investment because it has a promising plan of how it intends to use the capital gained from the IPO to fund growth. This in combination with that fact that its net losses and low free cash flow yield will be countered by the funds raised from the listing, makes Coupang an increasingly attractive investment.
By Robert Armstrong-Jones
Sector Head: Gregor MacDonald