Coupang reported 3Q24 earnings and the stock fell -12% after the release.

Revenue, excluding the FarFetch acquisition, was +25% on a FX-neutral basis.

Comment: There are a lot of different revenue numbers floating around so let us add some context. While they disclose revenue impacts from FX and the FarFetch acquisition in the press release, they also disclose the impact of the FLC accounting change in the slides—which began in 2Q23. While they now have lapped the change, increased adoption of FLC now has a smaller impact to revenues because it is recorded on a net basis, not principal basis as it was prior. (More on this accounting treatment in page 21 of our report).

This quarter’s +25% y/y growth compares to last quarter’s +23% y/y growth. Looking just at the Product Commerce segment they grew +20% y/y in 3Q24 versus +18% y/y in 2Q24, but we cannot call it an acceleration of revenue growth. Last quarter they noted that the 18% figure would have been 660bps higher without the FLC accounting change and in the slides, they disclosed that change would be 380bps for this quarter. This comes out to 3Q24 revenue growth of +24% versus last quarter’s +25%, a slight deceleration.

Gross profit, excluding FarFetch, increased +33% y/y and gross margin declined sequentially 20bps to 28.1%.

Comment. Cost of sales increased +21% y/y versus reported GAAP revenue growth of +27%, suggesting that the sequential margin compression could be distorted by the mentioned revenue changes. Mix shift from 1P to 3P also causes distortions to gross margin. However, we would expect it to generally be accretive to margins.

Adjusted EBITDA was 4.4%, down 10bps sequentially.  

Comment. Product commerce compressed 140bps q/q from 8.2% adjusted EBITDA margin to 6.8%. They attribute this to fluctuating fullfilment costs and an increase in tech spend. Developing Offerings improved from -22% adjusted EBITDA margin to -13%. The total loss from Developing Offerings in 3Q24 was -$127mn, an improvement of ~$70mn q/q.

TTM Operating cash flow was $1.8bn, down $805mn y/y. TTM free cash flow was was even more depressed, decreasing $920mn to $935mn. The difference is accounted for by an increase in capex ($665mn in PPE YTD).

Comment. Readers of our report might remember that we called out how free cash flow was temporarily inflated, and we are starting to see an unwinding of that dynamic. Bom Kim noted on the 3Q23 earnings call that “generally, we expect that free cash flow on a TTM basis will be closer to the levels of adjusted EBITDA generated”. In our report we noted that accounts payable as a % of revenue jumped from 13% in 2020 to 21% in 2023. This quarter it fell to 19%. They note the majority of the capex was due to Korean infrastructure investments.

Lastly, they dropped a press release noting that Bom Kim set up a 10b5-1 plan to sell 15mn shares (and he will separately donate 2mn). They note it is in part to satisfy tax obligations. After these sales he will still own just under ~9% of the company or ~158mn shares.

General Business Commentary.

Growth continues to hum, increasing +25% y/y and their product commerce segment increased +20% y/y. Nevertheless, they still represent just a small portion of Korea’s commerce TAM. On the call CFO Gaurav Anand notes that the retail spend in Korea was flat y/y, suggesting that they continue to gain market share. The WOW membership continues to work as intended. They disclosed the order frequency of Rocket WOW members is 9x that of non-WOW members. Furthermore, the most mature WOW members spend 2.5x the newest members. Additionally, their oldest cohort of members continues to increase spend every year. With +11% y/y Active Product Commerce Member growth (+800k q/q), the runway for that dynamic to play out has been extended.

We noted prior how they just had to execute on priorities very much within their competency—namely expanding selection and FLC—in order to continue to grow. FLC grew both units and sellers over 130% y/y. It seems like a somewhat low bar for a very well run ecommerce organization to continue to figure out how to add more items, which is all it should take for members to continue to increase their spend.

While they’ve always copied Amazon’s playbook, they have been good at iterating and adding changes to the Amazon system. Early adaptations were ditching most boxes (before Amazon) and pushing into grocery with Fresh and custom cooler bags that brought Coupang more success than Amazon enjoys in grocery. Now they are moving into Luxury, which helps gives us some clues as for the potential rationale behind the FarFetch acquisition. You might recall beauty/ cosmetics and apparel were two particularly weak points for Coupang and they were working to build out those categories.

In October they launched R.Lux, a luxury offering aimed at beauty brands. Market Kurly is a main competitor here and is most closely associated with high-end beauty products (and grocery). R.Lux, named after Rocket Luxury, offers shoppers a way to shop with a different UI, while shipments will still utilize Coupang’s fulfillment network. But to keep a higher-end image, they will come in different R.Lux packaging. There is a separate app for R.Lux, but it is also accessible in the existing Coupang app.

Their goal of achieving breakeven on FarFetch by the end of this year was hit this quarter. They mentioned on Taiwan that they are adding selection and partnering with brands, which has driven significant growth.  While we don’t give much attention to these Developing Offerings, they could be a significant source of value in the future, particularly their Taiwan operations. (Taiwan has about half the population of South Korea, but is roughly equivalent in terms of per capita wealth).

Bom Kim continues to execute superbly. We will now move onto valuation.

Reverse DCF.

We update our Reverse DCF below with the same assumptions we originally had in our report.

Revenue growth assumptions are as follows:

As a reminder, we did not sensitize around EBIT margin, but rather EBIT as a % of GMV. We did this to be agnostic to the distortions of 1P vs 3P accounting. This method makes the most sense to us because the unit profits of a 1P vs 3P transaction should be the same overtime, even if 3P shows a higher margin %.

Below is our range of “GMV Profit Margin” we sensitized around. In our report we estimated 2023 GMV at $38bn (with a range of $35-42bn). We will start our DCF with a 2024E GMV estimate that is 15% higher, or ~$44bn. (Remember, we have now converted to USD and growth rates converted back into dollars are lower than their FX-neutral growth rate).  

Below we can see the outputs of the reverse DCF. The highlighted section is what they seem to be trending towards, extrapolating based off of current results. Of course, an investor must make their own judgement on what to assume for Coupang’s GMV growth and ultimate profitability.