Thread by @kevg1412

1/ $CPNG was down 7% this morning on 3Q21 earnings.

Is this a case of investors getting ahead of themselves with high expectations or is there something wrong with the direction of the business?

A short update on Coupang below 🧵.

2/ Their 1P business, “Net Retail Sales” was +43% y/y to $4.1bn, down from +65% y/y last quarter. This 2300bps sequential deceleration is on very tough comps though and still good in absolute with $CPNG growing more than 2x as fast as the Korean ecommerce market.

3/ Active customers increased to 16.8mn, for the 15th consecutive quarter of 20%+ growth. However, active buyers in 2Q21 were 17mn. This sequential decrease is what is likely spooking the market.

4/ Remember though, last quarter when they reported 17mn active buyers, they were including 2Q20 buyers which was at peak demand increases from COVID. A portion was one-time activity that distorted their underlying structural growth rate higher.

5/ It may be helpful to compare to $ETSY, who saw something similar. Core platform buyers peaked in 1Q21 at 89.7mn, but 2 Qs later they reported 89.4mn. While this may look concerning, what’s happening is ETSY is replacing crappy users who bought once with real new buyers.

6/ This allows $ETSY to hold buyers flat, which is not easy! Just look at $EBAY who lost 12mn customers or 7% of their buyer base in just 6 months. In this context, $CPNG not keeping just 1.2% of their peak base doesn’t seem so bad…

7/ On the call though they gave an even better reason for this: they stopped taking orders. As $CPNG was reaching capacity, in order to save customer experience they closed orders when they were at full capacity, which they estimated cost them 5 percentage points of growth.

8/ Additionally, they also curtailed advertising since they couldn’t handle the demand from incremental customers. This is a great problem to have. Demand does not seem to be an issue.

9/ More important though, is how spend per buyer is growing: $CPNG incredibly reported that every annual cohort since 2010 increased their spend by 25% (!). They are rapidly increasing their share of ecommerce with customers who purchased from 6 or more categories doubling y/y.

10/ We have to wait for their 10Q to see 3p merchant services, but they noted that ad revenues (which are very high margin) tripled y/y. Selection from 3rd party SME’s is up almost ~3x y/y and 80% of their total merchants are SMEs, showing them winning the long tail of merchants.

11/ Net Other Revenues, which also includes new businesses like CoupangEats is +113% to $500mn versus +153% last quarter. Bom Kim noted that CoupangEats is the fastest growing business in their history.

12/ Their CoupangEats app was the most popular iOS app in Korea and 2nd most popular android app, beat only by the government’s COVID app. Management noted retention rates are good with frequency moving in a positive direction.

13/ In totality, Wall Street was looking for ~$4.8bn of revenues vs their reported $4.65bn and adjusted EBITDA losses were slightly larger than forecasted at $207mn as they continue to invest. We shouldn’t focus too much on this “headline” miss.

14/ $CPNG added 8mn square feet of infrastructure YTD, including almost doubling their fulfillment space for Rocket Fresh (rapid grocery delivery offering). Additionally, they continue to increase same day delivery on more selection.

15/ This increases costs in the short term, but as they continue to scale their cost per package will decrease. Despite the ongoing investments, gross margins have increased 130bps y/y to 16.2% with gross profits +62% y/y to $750mn.

16/ On the call they said this is below their prior peak gross margins which were nearing 20% (a figure that can’t be confirmed in the consolidated financials), but calling that out signals their confidence in on-going margin expansion despite their on-going logistics build.

17/ Don’t miss the forest for the trees. They grew 2x the total ecommerce market, while actively turning customers away. The first business they set up outside of their core commerce, CoupangEats, is growing like wildfire and they continue to “WOW” customers.

18/ Quarter to quarter there will always be some short term noise, but we do not see anything concerning. If you listen to the call you will hear management saying all the right things about focusing on experience and keeping customers happy a la the Bezos playbook.

19/ Valuation is tricky as it’s no secret that Coupang is a great company. DJY Research subs know we don’t mess around with comps and other pricing metrics and instead focus on estimating mature earnings power.

20/ This has many moving parts, but with our long term earnings power estimated band of $3-9bn, we could see a high-teens return in an optimistic scenario and a mid-single digit return in a more bearish one.

21/ This doesn’t include optionality from other new businesses though. In our full write-up (link below) we go through a granular financial build and more business specifics.

Please let us know if you think we are missing something from this quarter!

djyresearch.com/2021/10/05/cou…