Coupang Stock: The Problem Really Lies With SoftBank (NYSE:CPNG)

Coupang headquarters in Silicon Valley

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Investment Thesis

Coupang, Inc. (NYSE:CPNG) reported its FQ4 card early last month, which came in below consensus estimates. The company felt the pressures from the COVID-19 cases and dealt with labor supply constraints. Consequently, capacity utilization underperformed, leading to some operating de-leverage.

Nonetheless, management offered sanguine guidance for Q1. It was an interesting commentary, as Coupang emphasized that investors should look ahead. CEO Bom Kim articulated (edited):

We spent much of Q4 redirecting resources to strengthening, not just adding capacity and improving operating leverage. Those efforts are bearing fruit.

So far in Q1, we’ve secured record capacity while driving an over 250 bps increase in gross margin QoQ. We’re on track in Q1 to deliver the highest gross margin since COVID began, and that still includes COVID-related costs and investments in new initiatives. We’re excited that 2022 is off to a good start. (Coupang’s FQ4’21 earnings call)

CPNG stock has been in the doldrums since its listing early last year. Nonetheless, dip buyers have attempted to help stage a recovery several times.

However, when its largest shareholder SoftBank’s (OTCPK:SFTBY) $1B block trade at an average price of $20.87 in mid-March, was unveiled, CPNG stock took another tumble to new lows. Furthermore, SoftBank’s previous share sale of $1.7B in September ’21 also impacted CPNG stock. The “NASDAQ Whale” has become a significant headwind for Coupang investors.

CPNG stock last traded at 1.33x NTM revenue. It was also near its all-time low of 1.16x hit in mid-March. Furthermore, it also traded well below the most conservative price targets (PTs). Therefore, we remain optimistic about CPNG stock’s long-term potential.

But, we implore investors to monitor SoftBank’s upcoming moves closely as the tech rout has impacted its leveraged portfolio significantly. Therefore, SoftBank CEO Masayoshi Son & Team could be forced with further stock sales, including its highly lucrative Coupang stake.

How Was Coupang’s Q4 Earnings?

Coupang revenue segments

Coupang revenue segments (S&P Capital IQ)

Coupang GAAP EBIT margins and FCF margins

Coupang GAAP EBIT margins % and FCF margins % by FY (S&P Capital IQ)

Like many of its e-commerce peers, Coupang’s topline growth was also impacted by the digestion of the pandemic premium. We have also observed a similar impact on Amazon (AMZN), Etsy (ETSY), and MercadoLibre (MELI), where growth decelerated from their pandemic peaks. Furthermore, Coupang also had to deal with costs inflation and tight labor supply, which resulted in under-utilization in some of its recent capacity investments. Therefore, it affected its fixed costs leverage in FQ4.

Nonetheless, Coupang has continued to grow faster than the South Korean e-commerce market as its revenue increased by 33.5% YoY. While Coupang was reticent in guiding FY22 revenue, it expected adjusted EBITDA losses to decrease to $400M in FY22 from FY21’s $747M. In addition, it included an additional $200M of investment in new growth initiatives. CFO Gaurav Anand articulated (edited):

To provide additional context, on the new Product Commerce segment, we expect it to turn profitable by Q4, a significant improvement from the negative 2.6% margin in Q4 of 2021.

On Growth Initiatives, we continue to invest in Eats as it improves profitability. In addition, we plan to increase investments in nascent Growth Initiatives that have shown early promise. Investments across video, international expansion, and fintech will increase from around $85M in 2021 to approximately $200M in 2022.

We are investing more to further iterate on these offerings and build what we believe can be meaningful growth drivers beyond 2022. (Coupang)

Therefore, we certainly felt comfortable that the company’s aggressive investments in scaling up have helped improve its path towards profitability.

The company also emphasized that it has the most significant fulfillment footprint in South Korea. Kim accentuated (edited): “We believe we have a larger footprint than the rest of the e-commerce players combined. And in the past year alone, we added 15M square feet, widening our lead in the market.”

But, The Problem Lies With SoftBank’s Stake

SoftBank is Coupang’s most significant shareholder. The company reportedly still owns a 26.3% stake in the company, worth $8.5B. Before the divestments and CPNG stock’s decline, SoftBank’s stake was valued at about $20B. SoftBank’s VC investments in Coupang in 2015 and 2018 amounted to $3B based on data from Therefore, SoftBank is undoubtedly still profitable from its earlier investments in the company.

But, Son & Team has been facing massive pressure from the leveraged investing model of SoftBank. SoftBank borrows against its post-IPO holdings to “double down” on new or additional investments in newer pre-IPO upstarts. While the leveraged model could work wonders when the market is in a strong uptrend, the reverse is true in a steep decline.

That was precisely what happened to SoftBank over the past year as many unprofitable growth and tech stocks were hit significantly. Furthermore, its massive stake in Alibaba (BABA) has also been battered over the past two years since the Ant Financial debacle. As a result, SoftBank’s loan-to-value (LTV) ratio has risen to “alarming” levels. It reached 21.6% based on its recent filings as of January 1.

But, we all know what has happened since the start of the year. Tech and growth stocks have declined even further until the recent bottom. Therefore, we believe that SoftBank’s LTV should have also risen markedly higher.

Furthermore, SoftBank communicated that its target was to maintain an LTV ratio below 25% to reduce the risk of overexposure. While SoftBank is not required to disclose its LTV ratio daily, S&P Global estimated that it reached 29% in early March, which was also pretty close to when it unloaded 50M in CPNG stock on March 14.

The recent tech recovery should have relieved some pressure from Son & Team. However, we think it has stunned Son pretty much. FT reported that Son directed his team to “slow down investments” in a recent meeting. It added (edited):

SoftBank founder Masayoshi Son has told his top executives to slow down investments, as the world’s largest tech investor seeks to raise cash amid falling tech stocks and a regulatory crackdown in China.

One person familiar with the company’s plans added that SoftBank is pushing to raise cash and is evaluating assets that could be liquidated. During the sell-off, Son became alarmed over his personal borrowings against SoftBank shares, people close to him said. (Financial Times)

In addition, we believe the failure of the $40B Arm acquisition by NVIDIA (NVDA) also complicated matters for Son. Bloomberg reported that Son is looking to list Arm at an even higher valuation of $60B. Therefore, if Arm’s eventual IPO valuation was not in line with Son’s expectations, we believe SoftBank could look to divest profitable stakes like CPNG further to relieve the pressure on its LTV ratio. These huge moves could lead to further headwinds on CPNG stock in the near term.

Is CPNG Stock A Buy, Sell, Or Hold?

CPNG stock is a speculative Buy. We remain long-term holders in CPNG stock, but we are not adding new exposure.

However, if you do not have any exposure, the current price point may offer an attractive opportunity to add. We believe that the recent tech recovery should alleviate some pressure on SoftBank. Moreover, CPNG stock has been trying to consolidate at the current levels.

Nonetheless, CPNG stock is still in a secular downtrend. Moreover, we don’t think the downtrend could shift into upward momentum until SoftBank’s woes over its leveraged bets improve.

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