One of Wall Street's biggest winners of the day is Coupang, an internet retail company whose shares have climbed 5.5% to a price of $18.0 -- 23.18% below its average analyst target price of $23.43. The average analyst rating for the stock is buy.CPNG may have outstripped the S&P 500 index by 5.2% so far today, but it has lagged behind the index by 23.7% over the last year, returning -43.5%.
Coupang, Inc. owns and operates in e-commerce business through its mobile applications and Internet websites primarily in South Korea. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items. This is why these companies are called "cyclical."
Coupang does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-0.04 and $-0.83. We can see that CPNG has a forward P/E ratio of -450.0 and a trailing P/E ratio of -21.7.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US consumer cyclical companies is 24.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Coupang's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -0.78. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing CPNG's growth potential .
To better understand the strength of Coupang's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 18,406,372,000.0 | 19,604,334,000.0 | -6.51 | -51.04 |
| 2020-12-31 | 11,967,339,000.0 | 12,483,333,000.0 | -4.31 | 57.87 |
| 2019-12-31 | 6,273,263,000.0 | 6,915,186,000.0 | -10.23 | 60.59 |
| 2018-12-31 | 4,053,589,000.0 | 5,105,995,000.0 | -25.96 | n/a |
- Average operating margins: -11.8 %
- Average operating margins growth rate: 22.5 %
- Coefficient of variability (lower numbers indicate less volatility): 83.2 %
Coupang's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | -410,578,000.0 | -673,663,000.0 | -1,084,241,000.0 | -492.24 |
| 2020-12-31 | 301,554,000.0 | -484,630,000.0 | -183,076,000.0 | 65.44 |
| 2019-12-31 | -311,843,000.0 | -217,823,000.0 | -529,666,000.0 | 32.77 |
| 2018-12-31 | -694,465,000.0 | -93,401,000.0 | -787,866,000.0 | n/a |
- Average free cash flow: $-646,212,250.00
- Average free cash flown growth rate: -131.3 %
- Coefficient of variability (lower numbers indicating more stability): 59.3 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for CPNG, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Coupang's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 15, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.11 as of the third quarter of 2022.
Coupang is by most measures overvalued because it has a negative P/E ratio, an elevated P/B ratio, and an irregular stream of negative cash flows with a downwards trend. The stock has poor growth indicators because it has a a negative PEG ratio and negative operating margins with high variability. We hope you enjoyed this overview of CPNG's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.
