Coupang IPO could test Wall Street's appetite for profits
Coupang Founder Kim Bom-suk speaks during the Milken Institute's 22nd annual Global Conference in Beverly Hills, Calif., April 30, 2019. Reuters-Yonhap
By Kim Yoo-chul
Coupang's looming initial public offering (IPO) on the New York Stock Exchange (NYSE) could offer a chance to test investors' appetite for a promising but risky business. The digital shopping platform has been growing rapidly, while it remains saddled by huge debt, and will face fiercer competition from rivals such as Amazon as well as potential regulatory and labor risks.
Coupang's business model is appealing, since the company is well-positioned to enjoy the so-called “network effect” when the value of a product, service or platform increases simply because the number of users grows and causes the network itself to grow.
Basically, Coupang's core value proposition is that it wants to level up “customer experience” at discounted prices with new offerings that help third-party contractors (merchants) to possibly grow their key businesses. In other words, the more favorable the reviews of its services from shoppers and customers, the more lucrative Coupang becomes to suppliers thinking about joining its e-commerce platform. This may help strengthen the price competitiveness and appeal of its products.
But considering the voracious appetites of Wall Street investors for continued profits from stocks they invested in, Coupang's apparent strategy to maximize cash reserves rather than net income and operating margins may dissatisfy existing and future investors, according to some analysts.
Coupang aims to raise between $30 billion and $50 billion through an IPO on the U.S. stock market. Also, local banking sources said Wednesday the company plans to borrow around $1 billion from top-tier investment banks.
“Coupang is expected to use the money it will borrow from some top-tier investment banks including Goldman Sachs, Morgan Stanley, HSBC, UBS and Deutsche Bank to expand its businesses,” an official said on condition of anonymity.
Last year, Coupang generated around 13 trillion won in revenue, doubling from a year ago. But its cumulative operating losses reached 4.5 trillion won. Coupang said its net loss narrowed from $1 billion in 2018 to $475 million last year.
“Coupang generated free cash flows of $163 million and operating cash flows of $301.55 million last year. As an investor, I seek growing businesses churning out free cash flows with an attractive yield. If we use the $50 billion that the Wall Street Journal believes will be the valuation at IPO as our proxy for enterprise value, we arrive at a free cash flow yield of 0.33 percent, which is highly unattractive,” Noah Wilson, an independent investor who worked at Barclays bank in London, wrote in an analysis for Seeking Alpha.
According to Wilson, the company's operating margin is unimpressive, standing at 4.41 percent in 2020.
“Operating margins are highly persistent across one- to five-year periods ― this is especially true in retail ― and are a crucial indicator of profitability. Shareholder value is created whenever returns exceed the opportunity cost of capital employed. With a negative operating margin, it is unlikely that Coupang will be able to grow shareholder value from its business activities in the near term,” he wrote.
As Wilson pointed out, a money-losing firm with higher enterprise valuations going public would challenge the IPO market. In the case of WeWork, investors were still worrying over a widened mismatch between its cash flow and the amount of liabilities because it rents out workplace to clients based on a “short-term contract,” making its stock quite volatile. WeWork saw a steep increase in terms of revenue but the boosted revenue has yet to translate into sizable profits.