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Sunday Finds + Thoughts On Coupang
Podcasts on British American Tobacco and Tractor Supply This Week
Welcome to Chit Chat Money’s Sunday Finds + One Thought From Last Week newsletter. In this newsletter you will find a topic I wanted to write about from last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
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Thoughts on Coupang
I bought some shares of Coupang this week.
On the Power Hour, we were joking that every stock we liked immediately went up after we ended the Arch Capital fund. Well, it wasn’t every stock.
After reporting Q3 earnings, Coupang fell around 10% and is now 70% off of all-time highs.
I’ve followed this business since reading its S-1. The founder’s strategy and rhetoric around “growth in free cash flow per share” was refreshing, especially in 2021. I made a note to track the business going forward, but wasn't going to buy at the IPO due to its absurd valuation, Plus, Softbank was a big shareholder and likely going to sell its stake (which happened).
Over two years later, the stock is in the dumps but the business seems to be thriving. If you are unaware, Coupang is the leading e-commerce platform in South Korea and essentially copied or improved Amazon’s business but in a more densely populated area. For a more detailed overview, I’d recommend checking out our podcast on the stock from this summer:
I would also recommend the DJY Research report on the stock.
In the third quarter, Coupang’s key metrics all looked fantastic:
Net revenue up 18% in constant currency
Active customers growing 14% year-over-year
Revenue per customer climbing higher
Gross margins expanded 113 bps to 25.3%
$1.9 billion in trailing twelve month free cash flow (god bless a permanent working capital advantage)
The stock trades at a market cap of $27 billion. That is 14x its trailing cash flow. To be fair, a lot of this cash flow is just working capital adjustments, but over the long run, management expects profit margins to hit around 10%.
Let’s stay conservative and say they only hit 7%. Over the last twelve months, Coupang has generated $23 billion in revenue. This is up 93.4% since going public despite major foreign exchange headwinds (USD appreciating vs. the Korean Won). On a 7% margin, that equates to $1.6 billion in normalized earnings power. Or a multiple of 17.
The company is now sitting on $5 billion in cash and has a long runway to grow in its home market (for more details on this, check out our pod or the DJY Research report). I wouldn’t be surprised to see the company double its revenue again within 4 - 5 years.
So why was the stock down? When reading through the conference call, it looked like analysts were concerned about growing losses in Coupang’s “developing offerings” segment.
I think the market is completely wrong with these concerns. Management explicitly said the Taiwan expansion is going quite well and decided to pour a bunch of money into the country. Losses will likely continue to increase in the short run, but this is probably a good thing. Over the long term, they should be able to get a fantastic ROIC within Taiwan if they can replicate the Rocket WOW ecosystem in the country.
With a population of around 25 million people on a small island, I think it is well worth the risk and a perfect market for Coupang to target. Plus, it has no impact on its South Korean segment, which is dominating the competition due to all the advantages it has built up.
So, I decided to buy some shares in the $15 range. My plan is to sell if:
The core South Korean business deteriorates
We get crazy multiple expansion. And when I say crazy, I mean something like 50x normalized earnings. I see no reason to sell something as attractive as Coupang has from a reinvestment perspective just because the stock gets a little expensive.
You typically only get one or two good ideas each year. I think this is one of them for me.
See you next week,
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3 Intriguing Reads
Blood in the Water - Fits and Starts
The case for Boeing is pretty straightforward. It is part of a global duopoly making airplanes. Global air travel is expected to grow at a 2% to 5% clip (depending on who is estimating) for the next few decades, creating massive demand for new planes. Boeing shares still trade at about half of where they did back in 2019, prior to the pandemic and some internal issues. In theory, all Boeing has to do is show up, figure out how to turn the lights on, and print money.
Alas, nothing has come simple for Boeing in recent years. First there was the 737 MAX tragedy, that became a debacle and exposed shockingly embarrassing internal controls. Then the pandemic. And since COVID there have been a string of other engineering and quality issues with not just the MAX but the 787 Dreamliner and a refresh of the 777 that have put the brakes on growth.
Greenlight Q3 Letter - Greenlight
Perhaps the best way to influence the upcoming U.S. election is to create some combination of wars and recession. Come next summer, nothing would make President Biden less popular than multiple ongoing conflicts and $6 gas at the pump. Having sold down the Strategic Petroleum Reserve and having adopted a policy that discourages drilling for oil, the U.S. has left itself quite vulnerable to higher oil prices. Globally, storage is at a multi-year low. Higher oil prices would squeeze the consumer and likely cause a recession. The resulting inflation would also put the Federal Reserve in the uncomfortable position of having to fight rising prices at a time of rising unemployment. This leaves the market outlook very concerning.