Shareholders of Coupang would probably like to forget the past six months even happened. The stock dropped 31.5% and now trades at $21.52. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Coupang, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Coupang Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are two reasons why CPNG doesn't excite us and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
For online retail (separate from online marketplaces) businesses like Coupang, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure.
Coupang’s unit economics are far below other consumer internet companies because it must carry inventories as an online retailer. This means it has relatively higher capital intensity than a pure software business like Meta or Airbnb and signals it operates in a competitive market. As you can see below, it averaged a 29.1% gross margin over the last two years. Said differently, Coupang had to pay a chunky $70.90 to its service providers for every $100 in revenue. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Coupang has shown mediocre cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2.4%, below what we’d expect for a consumer internet business.
Final Judgment
Coupang isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 3.5× forward price-to-gross profit (or $21.52 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.
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