[00:02:51] Shawn O’Malley: Today, I’m covering the Amazon of South Korea, Coupang, a company that has had enough success that it’s a key holding of Miller Value Partners, Bill Miller’s investment firm, who’s best known for recognizing the original Amazon’s value years before just about anyone else. Despite operating primarily in South Korea, Coupang has traded in the New York Stock Exchange for three years, but still hasn’t surpassed its original IPO price.

[00:03:16] Shawn O’Malley: Remarkably though, Coupang has grown its revenues by over 40 percent per year from 2018 through 2023, and now does around 27 billion in annual sales. In 10 years, the company’s revenues went from 350 million to 20 billion. After the IPO, the stock tanked and then traded sideways in mid teens territory for over a year.

[00:03:39] Shawn O’Malley: Although the financials were improving each quarter, the bumbling stock performance was likely tied to too much hype around the IPO, combined with poor sentiment around Asian stocks generally, as well as increased competition from Chinese e-commerce companies. So, with a population of 52 million in South Korea, nearly half of the country’s population has recently used Coupang, and nearly a third are enrolled in its version of Amazon Prime known as Rocket Wow.

[00:04:06] Shawn O’Malley: Coupang has, in short, captured the hearts and wallets of nearly every household in South Korea in less than 15 years, partly that comes from succeeding so well in adjusting the Amazon online retailer model for the customs and preferences of South Koreans. Additionally, it helps that internet usage is so common in the country with 97 percent of the population using the internet compared to just 78 percent in China, e-commerce is a natural part of life in South Korea’s densely populated cities where e-commerce represents about half of all retail sales in South Korea.

[00:04:42] Shawn O’Malley: The number is only 16 percent in the U S. So like I said, e-commerce adoption in the country is just very, very high. Meanwhile, Coupang holds a roughly 24 percent market share versus its nearest rival, a company called Naver, which holds the same amount, with eBay trailing behind, while Amazon has essentially no presence in the country.

[00:05:03] Shawn O’Malley: Behind this vision is Bom Kim, who moved to the US as a child and later enrolled in Harvard’s MBA program before deciding to chase something even more ambitious. Around this same time, Groupon was rapidly growing in popularity across the U. S. And its success was reportedly the spark that inspired Kim to try and create something similar back home in Seoul.

[00:05:25] Shawn O’Malley: In 2010, while Groupon was turning down a 6 billion acquisition offer from Google, Bom Kim was building Coupang. To just touch on the name for a second, Coupang is pretty clever. It’s meant to imply flash deals through a combination of the word coupon and the South Korean onomatopoeia, pang, which is like the English word for bang.

[00:05:47] Shawn O’Malley: And funny enough, Clayton Christensen was one of the first major investors to see the promise of Coupang. If you don’t recognize that name, Christensen is the author of the Innovator’s Dilemma, a really impactful book on the competitive dynamics around innovation and specifically disruptive innovation.

[00:06:03] Shawn O’Malley: From there, Coupang attracted the attention of a few other high profile venture capital firms in Silicon Valley, and it soon had enough capital to seriously invest in growth. By 2012, Coupang was already one of South Korea’s largest e-commerce companies, and that attracted investments from BlackRock and Sequoia, and then a massive 1 billion investment from SoftBank in 2015.

[00:06:24] Shawn O’Malley: And in 2018, Coupang’s Rocket Wow program was in full effect, guaranteeing 7 hour delivery on millions of items. Bom Kim is the driving force behind Coupang, and honestly, if something were to happen to him, the investment thesis for the company would definitely be diminished, at least in the short term.

[00:06:42] Shawn O’Malley: Coupang’s primary operational goal is to deliver new moments of wow for customers, and just reading about the efficiency of their operations and their flywheel, I’m pretty wowed thousands of miles away. Peter Westberg of Quarter does an excellent job telling the story of Coupang, and I’m referencing some of his writing here, so I’ll link to his full article in the show notes below.

[00:07:02] Shawn O’Malley: He points out that like Amazon’s Prime Video, Coupang has its own streaming service called Coupang Play that carries unique economic benefits. Quoting Jeff Bezos, we get to monetize in a very unusual way. When we win a Golden Globe, it helps us sell more shoes, and it does that in a very direct way.

[00:07:22] Shawn O’Malley: Because if you look at prime members, they buy more on Amazon than non prime members. And one of the reasons they do that is once they pay their annual fee, they’re looking around to see how can I get more value out of the program? And so they look across more categories. They shop more, a lot of their behaviors change in ways that are very attractive to us as a business.

[00:07:42] Shawn O’Malley: And so again, that was Amazon’s Jeff Bezos. And I think Coupang probably sees things very similarly. They’re not trying to win the streaming wars in the same way that Disney or Netflix are. With 8 million active monthly subscribers to Coupang Play, everything for them ultimately circles back to selling more products on their signature marketplace.

[00:08:00] Shawn O’Malley: And there are a lot of interesting ways they can do that. As we’ve seen with Amazon, large capital investments aren’t necessarily a bad thing, even if they distort profits on paper for years at a time, Amazon has plowed a chunk of its revenues into valuable investments for decades that have compounded and made its offerings more and more valuable from more fulfillment centers to reduce delivery times to acquiring whole foods and partially turning its stores into customer service centers.

[00:08:26] Shawn O’Malley: Investments that further deepen the moat around a business like Amazon are not for waste, and I think Bom Kim and the rest of Coupang’s management team know that well. Bom Kim also takes a very customer centric approach. Everything from accommodating return policies to multiple delivery options is meant to, in Bom Kim’s words, solve problems customers didn’t even know that they had.

[00:08:48] Shawn O’Malley: No matter where a customer is in South Korea, 99 percent of Rocket Wow deliveries are completed within a day of making the purchase. And when it comes to returns, if for any reason the order is incorrect or unsatisfactory, customers can simply put the product on their doorstep in its original packaging, notify Coupang, and an employee will come pick it up and process the return.

[00:09:09] Shawn O’Malley: No extra packaging or labels are required, and you’re refunded immediately after it’s picked up. This convenience also applies to Rocket Fresh for groceries too. I’m not sure about the process for returning food or whether you can even do that, but you can order groceries and have them delivered to your door in refrigerated bags by the next morning, which I think is just really impressive and I wish that was more of a common thing here.

[00:09:32] Shawn O’Malley: What’s also special about Bom Kim is that he understands value creation for shareholders. On Coupang’s earnings calls, you’re likely to hear him say that their goal is to limit shareholder dilution and to maximize the free cash flow produced by the business. So to me, that’s a good sign as an investor and in describing Coupang’s competitive advantages and economies of scale, the company’s S1 filing adds, quote, we benefit from a self reinforcing virtuous cycle in which advantages compound with each additional customer in transaction on our network and are reinvested to further drive ecosystem growth.

[00:10:04] Shawn O’Malley: As a result, our differential value proposition grows over time, benefiting everyone in our ecosystem. This is best known through the following flywheel. Step one, as customers learn more about a superior experience, we believe more customers will choose our offerings and existing customers will also spend more and more.

[00:10:22] Shawn O’Malley: Step two, increasing scale will make us not only more compelling to merchants and suppliers, but also generate economies of scale and operating leverage, resulting in increased profits. Step three. Increasing profits enables us to invest in efficiency, improvements, more compelling offerings, and lower prices, all of which attract more customers and merchants to our ecosystem and increase their engagement.

[00:10:45] Shawn O’Malley: In step four, the net result is that we are building a consumer and merchant network that we expect to continue to grow and monetize over time. Backing all that up, in a 2021 earnings call, Bom Kim told investors that, according to a third party studies, Coupang’s prices were, thanks to the virtuous cycle described a moment ago, cheaper on average across all product categories than their competition.

[00:11:07] Shawn O’Malley: In some ways, at least according to Bom Kim, the story of Coupang is the story of South Korea. This is a country that had a GDP per capita of 79 in 1960 and is now a top 10 economy in the world. The wealth created in South Korea in the past few decades is breathtaking. The engineering and creativity of Korea have propelled what’s known as the miracle of the Han river.

[00:11:31] Shawn O’Malley: And Coupang is one of the country’s shining stars embodying the best of what it has to offer. Looking around at the global e-commerce landscape, you’ll see Amazon, Alibaba, MercadoLibre, JD.com, Coupang, and many smaller rivals. While there are definitely turf wars emerging as these companies expand into new markets, each of these big players dominates its home and regional markets.

[00:11:54] Shawn O’Malley: These companies have really morphed into everything businesses, from payments to cloud computing, streaming, live sports, grocery delivery, and much more. They each have a unique flywheel that entrenches their competitive advantages in their core markets. There’s also more pure discount e-commerce businesses out there like TMU that are threatening the Amazons and Coupangs of the world.

[00:12:15] Shawn O’Malley: The most important thing underpinning Coupang and Amazon is, of course, logistics. The ability to seamlessly transport and store just massive volumes of stuff. While we don’t have the exact numbers for Coupang’s supply chain, its peer JD.com takes a similar approach and has truly immense operations with 75, 000 trucks, 2, 200 warehouses, and over 300, 000 workers.

[00:12:39] Shawn O’Malley: For Coupang, its logistics footprint is something like 55 million square feet, which for context is the equivalent of almost 20, 000 tennis courts, or all of lower Manhattan. This is easily the company’s greatest asset, and AI is increasingly helping companies like Amazon, JD, and Coupang maximize their efficiency.

[00:12:58] Shawn O’Malley: Coupang employs an army of automated vehicles to transport items in their warehouses that reduce walking and lifting for human employees by up to 65%. Reportedly, within seconds of an order being placed, Coupang’s AI begins planning the optimal pathway for a product to be transported through a warehouse where it should be loaded on a truck, and the routes that drivers should take based on real time data.

[00:13:22] Shawn O’Malley: They’ve essentially cut out all the heavy lifting and physical work done by humans, and It’s honestly very impressive. There are some super cool videos. They’re AI powered logistics centers on YouTube. So I imagined warehouses would look like in the future, but I had no idea this sort of sophisticated technology and robotics were already being implemented at scale.

[00:13:40] Shawn O’Malley: I guess that’s what you have to do to be able to have it such that customers can literally order a product before they go to bed and find it on their doorstep the next morning. Coupang puts Santa Claus to shame, honestly. They probably don’t need my marketing help, but my slogan for them would be, with Coupang, every day is Christmas.

[00:13:56] Shawn O’Malley: Because with that kind of delivery speed, it must really feel like it. And its logistics are surprisingly environmentally friendly, or at least surprising to me, because obviously there’s still a considerable impact, but they do seem to make very meaningful efforts to reduce that. 50 percent of its vehicle fleet in key cities across South Korea is electric, and 85 percent of its rocket deliveries use reduced cardboard packaging that saves the equivalent of 9 million trees annually.

[00:14:22] Shawn O’Malley: It also collects plastic packaging and does closed loop recycling, such that 80 percent of its packaging is made from recycled material. Yet, Coupang has built out the largest B2C logistics footprint in Korea, enabling it to operate its infrastructure, ensure timely and reliable delivery to customers, and maintain end to end control over the entire customer experience.

[00:14:43] Shawn O’Malley: Their financial filings, Coupang tells investors that quote, through the course of scaling, we have developed insights and invested in a series of systems and processes that continuously improve to lower costs and increase value to our customers. We believe it is hard to replicate. In addition to the physical infrastructure, the combination of insights, processes, systems, and capabilities around complex operations that have developed over various stages of evolution and scale. When it comes to competition within South Korea, there’s Naver, which runs the largest search engine in South Korea in addition to its online marketplace and is second behind Coupang in e-commerce market share.

[00:15:22] Shawn O’Malley: Given that Naver is the search engine of choice for South Koreans over Google, that dominance over people’s screen time gives them a real potential advantage in building out an e-commerce marketplace that takes further share from Coupang. But Naver’s approach is different in that rather than building out a logistics footprint like Coupang, Naver is simply a marketplace connecting buyers and sellers while relying on partnerships with existing logistics providers to fulfill their orders.

[00:15:48] Shawn O’Malley: Within South Korea, Coupang also faces threats from Chinese competitors like Temu and AliExpress that try to drive impulse purchases. You’ll know what I mean if you’ve ever seen Temu’s advertisements. It’s all about flash sales and very gimmicky sort of stuff like that, but it’s a very aggressive marketing strategy that is maybe not sustainable, but it is effective.

[00:16:09] Shawn O’Malley: In 2023, AliExpress doubled its monthly active users in South Korea, whereas Coupang is the opposite. Trying to build lasting customer loyalty while completely outshining competition on quality and delivery times. And then there’s 11th Street and Gmarket, which are smaller online marketplaces that have less than 10 percent market share and have lost share to Coupang in the past few years.

[00:16:31] Shawn O’Malley: Through AliExpress, Alibaba is planning to invest over 1 billion in South Korea in the next few years. But I do think Aliexpress and Temu have different value propositions. Sometimes products can be found there for much cheaper than on Coupang, but you might have to wait a week or two for them to arrive, and generally the product quality is just worse.

[00:16:49] Shawn O’Malley: AliExpress currently offers 3-5 day delivery for most orders in South Korea, and with the new logistics center they plan to build, they could potentially do next day delivery for many of their orders by 2026, but still, that would put them several years behind Coupang. At the same time, Coupang will continue to increase the range of items they offer, quality assurance, and may even increase their own delivery time to just a few hours in major cities.

[00:17:13] Shawn O’Malley: Seemingly in response to Alibaba’s announcement, at around the same time, Coupang unveiled plans to invest 2 billion into expanding its own next day delivery to reach 88 percent of the country. So they are effectively doubling Alibaba’s commitments while also having a pretty considerable head start. I don’t want to pretend like Coupang doesn’t have legitimate competitive challenges, but I do think they’re playing from a position of strength.

[00:17:37] Shawn O’Malley: Besides having the largest market share and a bundle of other services embedded in its membership that makes its subscriptions more sticky, Coupang also has the fastest delivery times and ranks first in customer satisfaction among South Korean e-commerce companies. And it has the most unique visitors to its website across every single age demographic, so it appeals to both the young and the old.

[00:17:58] Shawn O’Malley: Coupang has long focused on first party sales, where they’re warehousing and selling products directly, similar to how you can buy certain Amazon branded items on Amazon’s marketplace. In 2023, first party sales made up 87 percent of the company’s total revenues. Amazon is obviously primarily a third party marketplace where thousands of other merchants sell products through Amazon and Coupang is increasingly building out its third party marketplace, too.

[00:18:24] Shawn O’Malley: About 61 percent of all sales on Amazon are via third party merchants. But with first party sales, the business model is pretty straightforward Amazon and Coupang source products directly, store them, sell them, and earn the entire sales price as a revenue. With third party sales, they’re more facilitating the revenues, so they might earn revenue by either charging merchants a transaction fee, or by earning advertising dollars by allowing brands to pay to have their product show up first when you search for a certain item.

[00:18:55] Shawn O’Malley: And building out the logistics network to further support third party sales will be key for coupéing to increase customer transaction volumes. They’ve already penetrated South Korea’s e-commerce market about as widely as you can, and now they need to go more deeply, getting the average Coupang user to interact with the platform more frequently, and of course, a wider range of products will help with that.

[00:19:14] Shawn O’Malley: As mentioned too, with more third party merchants comes the opportunity for Coupang to follow in the footsteps of Amazon in the U. S. and build an advertising business. Amazon actually now has one of the biggest digital advertising businesses in the world that goes toe to toe with companies like Meta and Alphabet.

[00:19:31] Shawn O’Malley: You probably can imagine that if someone searches for white ankle socks on Coupang or Amazon, the top results that show up are very valuable real estate, but this is a basic routine purchase and as a customer, you’re probably not going to go to the fourth page of results just to make a decision. You’ll probably seriously look at the top two, maybe three options and buy one of them.

[00:19:51] Shawn O’Malley: And if you’re a company that sells white ankle socks, you might pay a considerable amount of money to rank first or second in those searches and then extrapolate that across thousands of different products. Everything from baby oil to phone chargers, paper towels, shampoos, TVs, and smartwatches. Coupang is dealing with accusations of favoring its own private label goods over third parties, which resulted in Korea’s Fair Trade Commission fining Coupang over 100 million in June 2024, still with a mountain of consumer data at its fingertips, network effects, and millions of loyal customers.

[00:20:24] Shawn O’Malley: Coupang is likely very well positioned to grow its advertising business increasingly, similar to Amazon, but obviously on a smaller scale. With Amazon, it took two decades to embrace advertising on their marketplace because there were a lot of things they probably wanted to master first, like delivery times, selection size, the user friendliness of their interface, and similar sort of things like that.

[00:20:44] Shawn O’Malley: But once you have the foundations of an e-commerce marketplace business in place, sponsored search is a natural next step and a significant growth opportunity for a company like Coupang that’s at an earlier stage in its business. Pull the thread a bit more on Coupang’s Marketplace, it’s a platform that attracts small and medium sized enterprises in particular, which I’ll abbreviate as SMEs.

[00:21:06] Shawn O’Malley: SMEs leverage Coupang’s platform and nationwide fulfillment and logistics network to not only connect, but also help market their products to millions of customers. Over 70 percent of Coupang’s merchants are SMEs, and it’s largely a win win for both. SMEs want to be listed on Coupang since they can market their products to more customers and Coupang wants a broader selection of products for its customers.

[00:21:28] Shawn O’Malley: This is again a great example of that flywheel I mentioned earlier in action. Coupang naturally wants to have the widest selection possible of products to drive more traffic to their platform since it earns commissions for each third party transaction. Coupang also allows SMEs to reach new markets like Taiwan, which I’ll cover a bit more in a few minutes.

[00:21:47] Shawn O’Malley: And things are going well on that front. According to earnings calls from 2024, the third party business is growing twice as fast as its first party sales, but it’s worth mentioning that first party sales have higher margins. Somewhat controversially, Coupang’s got its eye on other opportunities at the moment.

[00:22:05] Shawn O’Malley: It made a 500 million capital allocation decision to acquire a company known as Farfetch, which is an e-commerce platform more narrowly focused on luxury fashion. This makes good sense because you may or may not be surprised to learn that South Korea has the highest level of per capita spending in the world on luxury goods.

[00:22:22] Shawn O’Malley: On average, South Korea spends 325 per year on luxury items compared with 280 per person in the US and 55 per person in China. So I can understand the rationale here with South Korea, and it could even be a good platform to expand globally as a luxury goods market. As a standalone business, though, Farfetch was not doing well and required cash infusions to remain viable.

[00:22:45] Shawn O’Malley: The company also had serious issues with order fulfillment. And to what extent Coupang can help solve that for them will really determine the worthwhileness of this investment. So far, there’s been some progress in turning Farfetch around from Q2 to Q3 of 2024. Farfetch’s operating losses declined from 31 million to just 2 million.

[00:23:04] Shawn O’Malley: Here’s a line from Bom Kim on what more to expect with Farfetch. Quote, we hope in a few years we’ll be having the conversation about how Coupang turned Farfetch into a business that transformed the customer experience around luxury fashion, while also providing strategic value for Coupang. It’s too early for that conversation today.

[00:23:23] Shawn O’Malley: Even if that full potential is not fully realized, we’re highly confident that this will prove to be a prudent financial decision. We’re already executing on a plan to make Farfetch self funding, with no additional investment beyond the announced capital commitment. He continues saying, quote, luxury is a very large market segment, and it’s one that hasn’t been captured in any meaningful way by e-commerce players yet.

[00:23:46] Shawn O’Malley: We know marketplace, we know operations, we know how to focus on and drive innovation around customer experience. And we saw a business that we thought, if it were run better at those things, could be much more valuable, and if run differently, could create possibly billions of dollars of equity value. And last quarter, Coupang launched R. Lux, a new luxury offering giving customers access to upscale beauty brands. They’ve partnered directly with luxury brands to provide what Bom Kim calls a new kind of white glove service. Customers are able to purchase exclusive brands via R.Lux and receive products from Rocket’s next day or same day delivery in elegant custom design packaging.

[00:24:28] Shawn O’Malley: So it’s a merger of higher end beauty products with world class convenience and customer service. Just from going through R.Lux’s site, some of the brands they appear to offer are Estee Lauder, Aveda, Clinique, L’Occitane, and dozens of others in that vein. Beyond first party and third party e-commerce and luxury goods, Coupang also does online grocery delivery, restaurant ordering and delivery like DoorDash, digital payments, and as I mentioned a bit earlier, streaming.

[00:24:54] Shawn O’Malley: Those services are largely bundled together under Rocket Wow memberships for a monthly fee of about 5. 74 per month, which has increased by more than 50 percent in the past year. Obviously, after raising Rocket Wow prices by so much in a year, Coupang is more seriously trying to monetize the value it creates for customers.

[00:25:13] Shawn O’Malley: While Coupang has probably hit a ceiling in South Korea in terms of attracting new active customers to the platform, about two thirds of all of its active customers are Rocket Wow subscribers, and that number has been growing at over 20 percent per year, so there could certainly be room to add a few more million subscribers.

[00:25:30] Shawn O’Malley: But at least in South Korea, I think it’s really going to be a question of squeezing more revenue out of existing subscribers and customers than attracting new ones. And on that front, Coupang is seeing promising results too, with both subscribers and non subscribers increasing their spending by 15 percent year over year.

[00:25:46] Shawn O’Malley: In August of last year, Bom Kim told investors that quote, while new customers contribute to future growth, our growth today and tomorrow is powered primarily by the increasing spend of our existing customers. We can’t stress enough how small a share we are of the massive and highly fragmented 560 billion commerce opportunity in the market and how early we are in that journey.

[00:26:09] Shawn O’Malley: So, the vision for Coupang extends well beyond just e-commerce. In different ways, Coupang’s management sees all types of commerce as growth opportunities for them. Most impressive to me, though, is that for each year someone is a Coupang subscriber, their total spending on Coupang increases. Someone who has been a subscriber for 5 years will spend nearly 5 times as much as they did in their first year as a subscriber.

[00:26:32] Shawn O’Malley: To achieve that, obviously they’re doing some incredible stuff to make their ecosystem so sticky and to draw people deeper and deeper into it. To that point, let me just share with you comments from real Coupang customers I found on reddit. This commenter in a post about rocket wow prices rising 58 percent said that quote I haven’t been to a store in months.

[00:26:51] Shawn O’Malley: Coupang Wow is great for people who don’t like going to the store, but want things quickly. I don’t have to go to the store a few times a week to make sure I get fresh food. I don’t have to wait in line after work or on the weekends. I don’t have to worry if it is the second or fourth Sunday of the month.

[00:27:05] Shawn O’Malley: Easily saves me two to three hours a week, if not more. And if you ever use Coupang Eats, you pay for your membership and a few deliveries a month with the discounts you get there too. One membership gets you discounts on food, free returns, next day delivery, a video streaming service, live sports, and discounts on restaurant deliveries all for under 10, 000 won. Best deal in Korea.

[00:27:26] Shawn O’Malley: That’s a pretty compelling testimony I wasn’t expecting to find on a post premised around criticizing the company for dramatically raising prices. But most of the comments actually said something similar that either the restaurant delivery, grocery delivery, or streaming services all by themselves were probably worth the cost of a subscription.

[00:27:42] Shawn O’Malley: After debuting in 2020, Coupang Eats was promptly named the best app of the year by Google Play and voted the most popular app in a survey of Korean users, and in early 2023, the unit economics for Coupang Eats became profitable for the first time. In the food delivery market, in terms of active users, Coupang ranks 3rd currently in South Korea with over 3 million users versus 19. 5 million for the market leading food delivery app. At less than 70 per year, Rocket Wow costs about 0. 22 percent of the median annual income in South Korea. Whereas Amazon Prime costs about 0. 23 percent of the median U. S. income, so Coupang’s subscription may be slightly cheaper, but this recent price hike brings Coupang roughly in line with where Amazon is, and Rocket Delivery is offered to non subscribers as well, so long as they make a purchase for more than the equivalent of about 3.50.

[00:28:35] Shawn O’Malley: In response to complaints about the ramp up in subscription pricing, the company stated that they would save millions of Koreans about 970, 000 won per year versus only charging less than 95, 000 won. So by Coupang’s calculations at least, they create an order of magnitude more value for the regular customer than they charge, which to me sounds pretty sustainable.

[00:28:57] Shawn O’Malley: People will always complain about higher prices. But I think this is more an instance of Coupang normalizing its rates after years of undercharging rather than some shameless attempt to price gouge. The full statement from the company goes as follows, quote, new members of Coupang’s Wow membership will likely see more discounts in the future.

[00:29:16] Shawn O’Malley: Based on data from major organizations such as Statistics Korea, and assuming consumers typical spending patterns, it is estimated that Wow members who routinely use all five services including free shipping, returns, direct purchases, streaming, and food delivery can save an average of 970, 000 won per year compared to non members.

[00:29:36] Shawn O’Malley: And for context, 970, 000 won per year is about 700 dollars, versus again, a membership fee of about 70 per year. And that is to say nothing about live sports meteorites available to Rocket Wow members. In spring 2024, the Dodgers and Padres opened the regular season with two games in Seoul, for which tickets and live broadcasting Korea were available exclusively to Rocket Wow members.

[00:30:01] Shawn O’Malley: Marking the first time that regular season MLB games have ever been played in Korea. And in case you didn’t know, Major League Baseball is very popular in South Korea. So, as I’ve talked about, Coupang has penetrated deeply into the South Korean market and millions of people love Rocket Wow. The question then is, what does growth look like for Coupang going forward?

[00:30:22] Shawn O’Malley: It’s fair to wonder if the company has already achieved its big picture ambitions, and South Korea in some ways it has, though I think there’s a lot of room left to drive more transactions on their platform and eventually raise Rocket Wow prices. All of Coupang’s customer cohorts have continued to increase spending on the platform each quarter thanks largely to the compounding value of Rocket Wow memberships.

[00:30:42] Shawn O’Malley: For example, if someone signs up for Rocket Wow to make use of Coupang Eats, they’re more likely to buy products on Coupang’s e-commerce site and vice versa. Each value add reinforces the entire ecosystem and draws people in. And while Coupang’s e-commerce platform has pretty deep penetration at around 9 percent market share, Coupang Eats has plenty of runway ahead for growth.

[00:31:03] Shawn O’Malley: So, for better or worse, Coupang is strategically looking outside of South Korea for major growth drivers. My initial thought is that this probably isn’t a great idea because other markets are already dominated by existing competitors, and the advantages Coupang has in its home market may not translate into even nearby countries.

[00:31:23] Shawn O’Malley: In my opinion, it would be better, broadly speaking, for Coupang to focus on building even deeper moats around its businesses in South Korea and further monetizing its users there, rather than allocating capital to markets where it has less clear advantages. For all its success, we all know that Amazon, for example, dominates the US, but it is by no means the e-commerce platform of choice for people in many of the other global markets it has tried to expand into.

[00:31:49] Shawn O’Malley: Expanding to a new country means starting from scratch in some ways to build out a new local logistics footprint while also having no network effects working in your favor. And having to navigate a new competitive environment, different environmental and business regulations, and just a different culture.

[00:32:05] Shawn O’Malley: Many of the things that were tailwinds in South Korea for Coupang become headwinds elsewhere. In 2021, Coupang announced a trial expansion into Japan, and less than two years later, it retreated from the country after concluding it couldn’t compete with Shopee, Rakuten, and Amazon there. They were ambitiously aiming to deliver certain goods in just 10 minutes in parts of Tokyo, But obviously it became clear that the amount of money they need to invest to break into the country’s markets was too big of a pill for them to swallow.

[00:32:33] Shawn O’Malley: And to the point on cultural nuances just being different, Coupang learned that in Japan, convenience stores end up being about three times larger on average than in South Korea, meaning it’s much easier for people in Japanese cities to get most of what they need at a close by store. So, immediately, any kind of rapid delivery service is just instantly less valuable relatively in Japan.

[00:32:55] Shawn O’Malley: And there’s of course other differences too. South Koreans work longer hours than just about any other developed nation, and that leaves them with less discretionary time to go shopping for miscellaneous supplies, and makes a service like Coupangs all the more attractive and even essential for daily life.

[00:33:11] Shawn O’Malley: As of 2017, South Korea ranked 16th globally in average annual working hours while Japan ranked 43rd, so there’s a meaningful gap in work life balance between the countries. Not to say the Japanese don’t like next day delivery or anything like that, but the point is that there are subtleties here that can explain why a service is a home run in one country and a flop in another.

[00:33:32] Shawn O’Malley: Having come up across stiff competition in Japan, Coupang’s management thinks it has learned a thing or two from that experience and is now setting its sights on Taiwan and Singapore. And you can tell they’re taking the opportunities here a bit more seriously. While they didn’t offer Rocket Wow memberships in Japan, Taiwan is the only country outside of South Korea where you can sign up for a Rocket Wow membership.

[00:33:52] Shawn O’Malley: Sizable investments in the country have enabled them to do that by completing the construction of their second fulfillment center in late 2023 while also unveiling plans for a third. As of early last year, Coupang’s cumulative investment in Taiwan was more than 260 million, mostly used for building warehouses and logistics centers.

[00:34:11] Shawn O’Malley: And with that continued investment comes a degree of optimism about Coupang’s prospects in Taiwan that they obviously didn’t have in Japan. According to Bom Kim in Q4 of 2023, the initial adoption of Rocket Wow memberships has actually been considerably faster in Taiwan than it was when it first launched in South Korea.

[00:34:28] Shawn O’Malley: And in part, that’s because Coupang has built a reputation for itself that carries over, but it also probably helps that Coupang can leverage data and lessons learned from the past few years. Bom Kim adds, quote, while Korean products are just part of the assortment that we offer to customers in Taiwan, we’re enabling tens of thousands of Korean companies to get their products to Taiwanese customers.

[00:34:49] Shawn O’Malley: So I have mixed feelings about the plans to grow internationally. On the one hand, I can see why management thinks it’s necessary and that there’s some positive momentum in Taiwan. And on the other hand, I wouldn’t be surprised if it proves to be a really wasteful misallocation of capital. As I try to be as conservative as possible whenever valuing a company, I wouldn’t want to put much weight on meaningful success in Taiwan for Coupang.

[00:35:11] Shawn O’Malley: But at the same time, that could be the difference maker in the next decade that turns Coupang into a major compounder. While Taiwan’s e-commerce market is about half the size of South Korea’s, success there could provide a blueprint for further expansion into Hong Kong, Singapore, or eventually back into Japan.

[00:35:25] Shawn O’Malley: But let’s take a look at the 2024 write up Bill Miller’s son wrote to explain their fund’s investment in Coupang. He says, quote, Coupang is the leading player in a large addressable market with numerous growth levers at a compelling price. The company only holds a single digit share of Korea’s commerce market, which is expected to grow at a 4 percent compound annual growth rate from 483 billion in 2023 to 563 billion in 2027.

[00:35:52] Shawn O’Malley: Active customers increased 16 percent in 2023 to 21 million, while revenue per active customer rose 6%, as active customers and revenue per active customer have grown at keggers of 16 percent and 18%, respectively, between 2019 and 2023. Miller IV adds that quote, international expansion is also ramping up, as Coupang’s revenues and customers in Taiwan more than doubled in the last two quarters of 2023, with management adding that the growth and level of adoption witnessed so far in Taiwan exceeds what was seen in Korea.

[00:36:24] Shawn O’Malley: Additionally, management believes it can leverage prior insights from experience in Korea to scale profits more quickly in Taiwan. Part of the thesis for Miller Value Partners 2 is that shares in Coupang have been relatively inexpensive versus other dominant e-commerce players like Amazon, eBay, Alibaba, Etsy, JD. com, Naver, and MercadoLibre. Especially considering that, in their words, Coupang has a superior growth profile. The company’s earnings before income, taxes, depreciation, and amortization, aka EBITDA, is expected to grow at 35 percent per year between 2023 and 2026, which is double the median of its e-commerce peers.

[00:37:02] Shawn O’Malley: Meanwhile, in terms of valuation, its enterprise value to sales multiple is at a 40 percent discount to its peer group, near a level that, at least for Amazon, historically marked a bottom. Another way to put that is to say that for every dollar of sales Coupang earns, the entire value of its stock and net debt is 40 percent less than the value per dollar of revenue assigned to its e-commerce peers.

[00:37:24] Shawn O’Malley: Compared to just Amazon at the time of recording, Coupang trades at less than half of its enterprise value to sales. And as I mentioned before, many investors see Coupang’s CEO, Bom Kim, as integral to the bullish thesis for the company. Bill Miller IV argues that, quote, Management follows a disciplined capital allocation approach, opting to invest only when they have conviction that the potential opportunities can reach meaningful scale with moat like returns.

[00:37:50] Shawn O’Malley: The top priority remains investing in organic growth and market share by delivering moments of wow for customers. Coupang has a low risk balance sheet with cash exceeding total debt by nearly 2.5 billion, which, along with ramping free cash flow, should provide ample funding for the company’s future operational needs, as well as financial flexibility for opportunistic M&A.

[00:38:13] Shawn O’Malley: CEO Bom Kim is a value creator and heavily aligned with shareholders owning over 10 percent of the company himself. And again, that captures things pretty well is a bit jargony, but you know, that’s just how Wall Street is. Simpler language, Miller thinks that Coupang has competitive advantages, chances to naturally expand their business and more cash than debt.

[00:38:34] Shawn O’Malley: Plus a CEO with a proven track record who isn’t just a manager in the business, but truly an owner of it. Over the past year, other investing gurus have held the stock too. Including Chris Davis, Stanley Druckenmiller, Arnold Vandenberg, Rod Barron, and even Bill Gates. Druckenmiller was actually a huge early investor in Coupang before its IPO, alongside the Japanese bank SoftBank, but he’s since trimmed down the position.

[00:38:57] Shawn O’Malley: With a CEO from both South Korea and the U. S., operations in Korea and Taiwan, a listing in the U. S., while also being headquartered in the U. S., and having a Japanese bank as its biggest investor, Coupang’s existence is a testament to our globalized world. Yet, as SoftBank has cashed in on its early investment in Coupang and sold hundreds of millions of dollars of shares of stock over the past few years, that has been a major headwind to the stock’s performance, even though this isn’t necessarily tied to the company’s prospects.

[00:39:25] Shawn O’Malley: We cannot know for sure why SoftBank is selling and whether it’s because they no longer believe in Coupang or if it’s simply because they want to raise cash to lock in their profit and invest elsewhere. I guess this is the latter, but the point is that there could be a range of reasons why large institutional investors liquidate their positions that don’t necessarily mean they aren’t still optimistic about a company and yet all that selling has weighed on the stock’s price performance, at least up until 2024.

[00:39:51] Shawn O’Malley: Creating opportunities for new long term investors to initiate positions in the company. Let’s look at the financial picture for Coupang now though. Cash conversion is an extremely important issue for large e-commerce retailers because they’re moving inventories so quickly. You can probably imagine that at scale there could be considerable cashflow mismatches.

[00:40:11] Shawn O’Malley: If as an online retailer, you’re paying for all of your inventory upfront from suppliers and draining your cash balance, and then getting paid on credit by your customers 90 days later. So the cash conversion cycle refers to how long it takes for a company like Coupang or Amazon to convert inventory into cash.

[00:40:28] Shawn O’Malley: The shorter the cycle, the better. Similar to Amazon, Coupang is one of the few companies that actually have a negative cash conversion cycle, meaning they collect payment from customers before having to pay their suppliers to provide the inventory. And in fact, this is a form of interest free financing that funds their operations.

[00:40:46] Shawn O’Malley: It also frees up cash to be used for other purposes. Coupang and Amazon operate at such large scales that it gives them enough leverage over suppliers to force them to accept delayed payments. Physical retailers like Walmart have limited product space, so they work with a selective group of suppliers who can negotiate more favorable terms for themselves.

[00:41:05] Shawn O’Malley: Meanwhile, Amazon and Coupang offer essentially an unlimited range of products, making any individual product supplier much more interchangeable and thus leaving them less able to negotiate better payment terms. They don’t particularly care about what product they sell or where it came from as long as it sells.

[00:41:21] Shawn O’Malley: So Coupang operates with two months of leeway and it’s negative cash conversion cycle. Where inventory is sold roughly two months quicker than when Coupang needs to repay its suppliers. This is a boon for the company’s free cash flows, which are basically the profits it left over after covering operating expenses and capital expenditures.

[00:41:39] Shawn O’Malley: In 2023, Coupang generated 1. 7 billion dollars in free cash flow, with much of that coming from its negative working capital and cash conversion cycle. Thanks in part to all of this supplier financing and just a conservative management ethos. Generally, who paying has a negative net debt. So it has considerably more cash on hand than it owes, which as a potential shareholder is something I find very reassuring.

[00:42:02] Shawn O’Malley: That isn’t to say the company isn’t investing in itself though. Coupang has spent at least 800 million per year over the last few years on CapEx, of which about 70 percent is reinvested into growing the company, while 30 percent goes toward what’s known as maintenance CapEx, which are the ongoing costs of maintaining existing assets.

[00:42:20] Shawn O’Malley: So for Coupang, that might mean 70 cents is going toward building new warehouses and fulfillment centers, while 30 cents of every CapEx dollar goes toward repairing or upgrading existing facilities. There’s a lot to like about Coupang, but the elephant in the room is that comparisons to Amazon fall short because Coupang does not have a cloud service business.

[00:42:38] Shawn O’Malley: Amazon Web Services is actually Amazon’s most profitable unit and a huge part of its valuation story. Food delivery, streaming, and e-commerce are all very, very hard places to compete and earn sustainable and attractive returns. And just because a company is known as the Amazon of XYZ country doesn’t mean it will do nearly as well for shareholders.

[00:42:58] Shawn O’Malley: Alibaba is known as the Amazon of China, and it’s sort of a horror story for value investors who have been trapped by that stock. These circumstances surrounding investing in China and South Korea are very different, especially since Coupang is headquartered and listed in the US, but the point remains Amazon is actually a more diversified business than Coupang and that’s something we shouldn’t lose sight of when comparing the two.

[00:43:19] Shawn O’Malley: The thesis in short though is that Coupang is a world class e-commerce marketplace with a membership ecosystem layered on top of that business that has been extremely effective at gaining acceptance across South Korea. And it’s very likely that customers will only become more active and valuable to Coupang over time.

[00:43:36] Shawn O’Malley: As its business in South Korea matures, expansion into the luxury goods market provides an opportunity for further growth, in addition to building from scratch its rocket wow ecosystem in Taiwan, and potentially in other Asian markets too. I could honestly probably spend an hour going over just the risks here, but the big ones that come to mind are that Coupang may lose out on market share or at least potential growth to ultra low cost Chinese competitors while burning capital on expansions into new marketplaces where they have no competitive advantages.

[00:44:04] Shawn O’Malley: When I look at Temu and AliExpress, these are companies that are even giving Amazon a run for their money in the U. S., and I don’t expect Coupang to have it any easier. Temu increased its monthly active users by over 60 percent from 2023 into 2024 in the U. S. And it surpassed Amazon as the most downloaded e-commerce app in the app store.

[00:44:24] Shawn O’Malley: By shipping directly from Chinese manufacturers, they can offer prices that just aren’t possible for Amazon or Coupang to match, with the sacrifice being made in delivery time. If there’s something you’re not too worried about the arrival time for, you could save significantly on Temu or AliExpress. And as inflation across the world has outpaced wage increases in the past few years, the cohort of budget conscious consumers who might be attracted to a service like Temu has definitely grown.

[00:44:49] Shawn O’Malley: At the same time, as South Korea’s population rapidly ages, that will take a major toll on the nation’s economy, which could partially explain why the company is keen to gain footing in other markets. I say this is a slow moving but more structural headwind for couping in South Korea, but of course South Korea and Taiwan are both at the top of potential geopolitical hotspot lists, so there’s always that risk too.

[00:45:11] Shawn O’Malley: And I don’t know if you’ve been paying attention to the recent news, but South Korea’s president did try to declare martial law, and people saw that as sort of a half hearted coup attempt. So there’s very real political risks that can emerge in even in a country that is seemingly as stable as South Korea.

[00:45:28] Shawn O’Malley: And again, that is to say nothing of the North Korean neighbors. It has just above it. Thus Coupang is the type of investment that you would want to watch very closely to monitor trends and customer activity in South Korea. Whether Farfetch is working out as hoped, whether the expansion abroad is panning out, or just chewing up capital, it’s definitely not a company you just buy and forget about.

[00:45:48] Shawn O’Malley: With that, it’s the type of company that two people can look at and come up with dramatically different valuations for, so I’ll just give that caveat before I actually try and come up with a fair value for it. I’ll also say that generally, I don’t prefer to set exact stock price targets because I try to think about a range of likely outcomes, returns that generate, and then reflect on how attractive those range of outcomes and prospective returns are.

[00:46:09] Shawn O’Malley: I really don’t try to predict an exact single outcome for any single company, especially not one like Coupang. Peter Lynch once said that the very best way to make money in the stock market is in a small growth company that has been profitable for a couple of years and simply goes on growing. Coupang is no small company, but it is likely to keep growing and growing.

[00:46:29] Shawn O’Malley: As an investor though, I’m not interested in growth at all costs. If revenues keep rising, but the economic value of Coupang’s operations primarily accrues to customers by way of lower prices and convenience, then that is not good for me as a shareholder. When I look at Coupang, I see a company with incredibly impressive operations that creates a ton of value for its users, but I’m not blown away by how that value has accrued to owners of the business yet.

[00:46:53] Shawn O’Malley: And I’m even more concerned about how competition could eat away at returns and capital. If it becomes a race to the bottom to make deliveries as fast as possible to an extent that that’s not profitable. Especially in the new markets. Coupang is expanding into. Just looking at analysts projections, baked into the stock’s valuation already seems to be the assumption that Farfetch will be effectively integrated into Coupang’s operations to an extent that, rather than hurting profit margins as it did in 2024, will contribute to doubling operating profit margins in the next year or so.

[00:47:21] Shawn O’Malley: I have a lot of faith in Coupang’s management, but that is definitely an optimistic assumption for one’s base case. In my model for the stock, I assumed the company would continue with double digit revenue growth as is projected for 2025 and 2026. Then from there, I wanted to get a feel for what earnings growth might look like in a more mature state.

[00:47:38] Shawn O’Malley: The company wasn’t focused as much on growth. So beyond that, I reduced expected capital expenditures by about two thirds to reflect that the only investments they’d be making are in maintaining their physical infrastructure, but not in growing it. And correspondingly, I cut down expectations for revenue growth beyond 2026 to just two to 3%.

[00:47:56] Shawn O’Malley: This might strike you as odd since we’ve talked so much about Coupang’s plans for international expansion, but I want to have a feel for the cash flows that Coupang could generate when not trying to grow aggressively in case it becomes clear in the coming years that international expansions just aren’t feasible.

[00:48:11] Shawn O’Malley: With those assumptions, I don’t really see a ton of meat on the bone here. Depending on the multiple of free cash flow you expect the stock to trade at in a few years. I get a fair value of around 28 or 29 per share today, and in a scenario where Coupang does succeed with breaking further into the Taiwanese market while also gaining further market share in South Korea and investing meaningfully to accomplish both, I can imagine how the company might grow at 20 percent or more for the next few years.

[00:48:36] Shawn O’Malley: But as that ripples back down to shareholders, I get a valuation that is, again, between 28 and 29. And in a more pessimistic scenario, where Coupang invests heavily internationally and realizes less growth than I hoped from it, I get a target price per share of 20 or less. Whenever you’re playing with the numbers like this and evaluation, take the results with a grain of salt.

[00:48:56] Shawn O’Malley: But the takeaway for me is that given how capital intensive e-commerce is and how much competition there is, it’s not surprising to me how low the profit margins are. And when you also consider that meaningful future growth could be partially contingent on successfully expanding internationally, I just don’t have a ton of conviction in Coupang compounding wealth for shareholders at market beating rates for the next few years.

[00:49:16] Shawn O’Malley: For a deeper dive into the numbers, I’d take an alternative approach to valuing Coupang in our intrinsic value newsletter, which I’d really recommend you check out. I built a whole model for Coupang that you can access for free in the newsletter premised on calculating the lifetime value of Rocket Wow members to shareholders.

[00:49:31] Shawn O’Malley: In these show notes below, if you’re not signed up already, I’ll provide the link to join the email list for free. So I really love the story behind Coupang, Bom Kim, and its advantages within Korea, but for me to really buy in, I need to see how things continue to progress with the expansion into Taiwan and how economical the costs of that expansion are.

[00:49:50] Shawn O’Malley: I also want to see progress with Farfetch in the luxury goods market as well as with advertising. If this was a stock I discovered in late 2023 before it spent the last year running up in price, I would feel much better about the margin of safety I was buying into relative to the company’s potential upside.

[00:50:06] Shawn O’Malley: But after running ahead more than 50 percent through 2024, we’re definitely getting much closer to fair value. As a result, I’ve decided not to add the stock to our intrinsic value portfolio, largely because it falls into the too difficult pile for me. I’ve read all kinds of analyses talking about how the company can benefit from operating leverage and scale up its profit margins while also growing internationally.

[00:50:27] Shawn O’Malley: I don’t doubt that, but at the same time, I can’t help but think I’m not in a position to succeed here as an investor. I’m not from Korea, so I can’t even use Coupang, nor do I know many people there who can tell me about how they use it and perceive Coupang, and I certainly don’t have a strong grasp on the nuanced cultural differences between, say, Korea and Taiwan, and how that will impact Coupang.

[00:50:48] Shawn O’Malley: And then, when you consider all the technology involved here, the complexity of the operations and the many e-commerce competitors across Southeast Asia and East Asia becomes a lot to wrap one’s head around. If you’re able to do that, kudos to you. It would probably be rewarded for having those superior insights.

[00:51:04] Shawn O’Malley: But for me though, I think it’s important that we all know our limits. And I can confidently say that this is well beyond my circle of competence. I did, however, learn a lot from studying Coupang. So I don’t regret it at all. Reality evaluation is that most of the time, most stocks trade pretty close to their intrinsic value.

[00:51:20] Shawn O’Malley: I’m looking for opportunities that are understandable to me, where I have a high conviction in the upside potential relative to the downside. And whereas some combination of fear, pessimism, or simple short term hiccups gives me the chance to invest at a bargain price relative to the value I’m getting.

[00:51:36] Shawn O’Malley: Since those are few and far between, I’m just going to have to be patient. So Coupang will remain on my watch list and over time I’ll probably get more comfortable with understanding its business and may even invest in it down the road, but for now it doesn’t make the cut. And next week I’ll again be reviewing another promising company and investment opportunity hoping to make the first addition to the intrinsic value portfolio that I’ll be building weekly on this show.

[00:52:01] Shawn O’Malley: Before I let you go, I want to share a line from Jeff Bezos as a little inspiration. He tells us, quote, what we need to do is always lean into the future. The world changes around you. And when it changes against you, what used to be a tailwind is now a headwind. You have to lean into that and figure out what to do because complaining isn’t a strategy.

[00:52:20] Shawn O’Malley: That’s all for today, folks. See you again next week.

[00:52:24] Outro: Thank you for listening to TIP. Make sure to follow The Intrinsic Value Podcast on your favorite podcast app and never miss out on our episodes. To access our show notes and courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.