Chit Chat Stocks - Coupang (CPNG) | Deep Dive

Episode Date: April 25, 2021

Coupang operates an e-commerce business primarily in South Korea. With South Korea's dense population Coupang is able to provide phenomenal delivery times because the company has a logistics center within 7 miles of 70% of the population. Listen closely as Brad, Brett, and Ryan discuss the company's background and where Coupang can grow from here. As always enjoy the show! Subscribe to Potential Multibaggers: https://seekingalpha.com/checkout?service_id=mp_1308 Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:47) Industry | (6:50) Management & Ownership | (10:05) Valuation | (13:21) Earnings | (14:23) Balance Sheet | (16:33) Our Analysis | (17:58) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode. We have Brad Freeman on the show as always. Brad, how are we doing today? Doing well. How are you guys doing? I'm doing good. Yeah, I was going to

ask Ryan as well. He gets a little mad, I guess, jokingly that I don't ask about how his day is going but we are in the same room so it's going fine though thanks for asking yes and we're talking coupang today it's uh pronounced c-o-u or no sorry spelled c-o-u-p-a-n-g south korean company so spelling is a little different if you're kind of an english native speaker you might not know how it's spelled it's you'd think it's called a coupang but it's actually pronounced coupang uh we had a whole debate on whether that was the proper way to say it we're to be talking that today but before we do our flagship sponsor for the week is potential multi-baggers uh ryan do you want to talk about them or is it my turn why don't you give a little

bit of uh well i'll give a little preface it's uh you've probably listened to him here on the show it's chris um his i think his twitter account is from value um and he basically finds companies that he thinks can 10X in 10 years. And I think you get a two-week free trial. So typically, yeah. He has probably one of the best, not only slugging percentages, but also averages of some of the investors

I've known over the last two or three years. So it's definitely worth at least signing up for that trial and seeing some of the content on there. Am I missing anything? Yeah, he's got a lot of different parts of it, but we'll just kind of highlight some different things each week. So, I mean, as a part of the service, he had an overview of the week every Sunday.

So he's constantly updating anything relevant with the portfolio companies, the markets in general, kind of acting as someone that you can have as a soundboard if you're not someone that's an expert in investing. But the only thing else we need to talk about is the sign-off. So if you want to become a multi, as the community is called, you can go onto Seeking Alpha and look for From Growth to Value. You can either Google it. You'll find it easily there. It'll be the first search thing. Or you can go to at FromValue on Twitter and find it out. Tell them we sent you.

All right. Let's talk Coupang. Ryan, do you want to introduce the company? Yeah. Their mission statement is to create a world where customers wonder, how did I ever live without Coupang? That doesn't tell you much about the company, but that's something they talk a lot about. So Bumsook Kim is the CEO and founder. And he doesn't really like it when people say this, but they're kind of the Amazon of South Korea.

very similar they're an e-commerce marketplace with a little bit more vertical integration i'd say so the coupon marketplace offers just about anything so you can get apples books toys you name it so it's fresh groceries to household items and most of the items are sold by merchants or small businesses so they provide the supply but coupon really does the rest a few stats about south korea in general as far as geographical size it's about one percent of the u.s um but it's almost 16 of the u.s population so it's a pretty dense country um and coupon has a logistic center within seven miles of 70 of the population so when you think about like logistics and fulfillment the closer people are together the more profitable it can be so that's why they've

been able to generate cat we'll talk about it operating cash flow uh they are operating cash flow positive and they operate their own fleet of trucks i think it's called rocket delivery so users can pretty much order anything any time of the day and get it i think almost 100 of orders are next day or sooner um but there's also the dawn service so if you order for anything up until midnight yeah this is kind of the unique thing that's even farther than what amazon offers currently right and so as long as you if you order something at 11 55 you can get it before 7 a.m so they're going 24 7 round round the clock um and then they also have the same day delivery as well but then as far as returns go all you have to do is hit a button if you want to return something

on your phone and then leave the item outside outside your door and they just come and pick it up so it's really really easy i'm sure they have security things to go along with it too people kind of question that they're like how does that work and it's like i'm sure they figure out how to make it work they don't just let packages get taken but yeah and then they've also eliminated a lot of the boxes so this is kind of their esg or stakeholder uh efficiency you know gets margins maybe a little better maybe yeah so it's eco-friendly bags that's sort of their new the new thing they've introduced and so if you look online it's kind of cool they all have like milk cartons and apple and like this eco-friendly bag just dropped off right outside someone's door

a little bit about the history though Bum-Sook Kim dropped out of Harvard's MBA program within six months of enrolling so he's a quitter, that's all you gotta know he wanted to start something, I don't think he knew exactly what he wanted to do

because when he first rolled out Coupang it was similar to Groupon oh that's why Coupang I don't know what it is in Korean but it's interesting maybe yeah maybe uh but then it evolved into almost like this ebay type of thing and was quite successful i think they had more than a billion dollars in sales um and they were set to ipo but apparently

at the 11th hour like right as they were going public uh kim pulled the ipo had some epiphany that uh we were he said that as i talked about with the mission they wanted to be critical they wanted people to say how could i ever live without coupon he said they weren't there yet and so they he kind of rolled it back and then they built out this end-to-end delivery system um and that's when they started to build out their ups type of service called rocket delivery since then they've obviously grown and they ipo'd less than a month ago so brand new to the public markets yeah and the key thing about this is that ups and fedex were not in south korea there wasn't anything before them so they're the first ones it's kind of strange that there there wasn't because south korea has been

such a developed economy for the last few decades but that was kind of the opening and uh they took Okay, I'm glad they didn't stick with Groupon because that really didn't work out. But I'll talk industry landscape competition. The South Korean e-commerce market is reportedly the sixth largest market for e-commerce globally. It was at about $128 billion in spend in 2019, putting ahead of France and behind Germany. So large, very large market. I think they're the 12th largest country by GDP. So even though they are one of the larger countries by GDP, their e-commerce market as a ranking is higher.

than a lot of other countries. And I think the market is supposed to go to $200 billion by 2024 for e-commerce. But Brad, do you have anything else to add there? Yeah, and just to give you an idea of how far along they are. I mean, South Korea's e-commerce penetration rate is the second highest in the world.

So I mean, I think behind China, it's ahead of our own, which I had to do a double take when I saw that the first time I wasn't expecting it. And maybe that's on me. But yeah, it's very far along in its e-commerce journey. Yeah, so I think the key there of why it's so far along is that, you know, it's 1% of the landmass of the United States. So it's a lot easier to build out the fulfillment network. I bet Coupang has to spend a fraction of what Amazon has to spend to build out Amazon logistics. And then also the densification of the, sorry, the density of the population, I think like 85% of the citizens live in urban areas, which also makes it easy for e-commerce to grow.

uh but enough on that in the s1 coupon identifies itself as within the retail grocery restaurant and travel industry not sure travel is a product they have currently but maybe that's a hint that something is coming i thought they did they have a travel product but i thought it was almost like an expedia type of product okay interesting yeah i didn't see that one i just saw some of the other ones they also have coupon play which is like a netflix type of thing really yeah they've got a few venture bets if you will yeah they do yeah yeah yeah they have a lot they have a lot i'm sure sorry brad we just talked over each other three times we've been doing that recently but uh they estimate their tan uh 470 billion dollars that's something to just i guess check uh but

again investing on a tan is not something to typically do our competitors include g market which is owned by ebay we make price never shopping and then there's some international competitors including amazon but amazon doesn't have any fulfillment in south korea um third-party sites are estimating that none of these competitors have close to as much as revenue as coupon although that could be wrong some of those third-party sites um you know are not as accurate as you would hope them to be and it looks like they're already on track or the number one e-commerce business in south korea right now i believe they're at 24 market share according to an analyst that was on CNBC at one point.

But that's just, again, another third-party estimate. And you mentioned Amazon there. Yeah, I don't think they're in South Korea, but I believe they've made an investment. I think I saw somewhere that they own 30% of 11th Street, which is sort of a commerce competitor in South Korea. Yeah, we'll have to move on. Yeah, Amazon invested $300 million in South Korean e-commerce company

at 11th Street. Yeah, but I think they also might be in there. But either way, I don't think that's a giant deal. Brad, do you want to talk management and ownership? For sure. So they actually gave data on their F1 post offering, which is really nice. A lot of the time they do before the offering. So you kind of have to just make the assumption that it's the same.

But as of right now, funds own about 16% of the voting power, but they own 61% of the outstanding class A and B shares. And then kind of flipping that, directors and executive officers own 82.8% of the voting power, but just 33.9% of the outstanding class A and B shares, I say just kind of sarcastically because 33.9% is still pretty darn elevated. But Bom Suk Kim on his own owns 76% of the total voting power and 10% of the float. So he definitely has, kind of what he says goes, I think is a good way to put it, especially at this point in time. And then kind of transitioning to leadership, Bom Suk Kim adding a little color to his resume. He did try to start his own magazine

after Harvard, that failed. And next was Kupong, which clearly did not fail. So good for him. Staying determined and motivated. His executive team includes previous VMware VPs, the former CTO at Uber and a Flipkart VP. So a lot of big names. And yeah, let's toss it over to valuation. Yeah. And I would also add there that the CTO with Uber is pretty interesting because regardless of what you think of like Uber's economics or anything like that, that part the logistics and being able to have the tech to know what's the most uh what's the most economically sound car to pick up or whatever they have to apply that same framework to coupon uh for deliveries or returns so yeah and they also have coupon eats which is a uber

eats and doordash competitor and they're really trying to build that out as well so that could be helpful although it's just you know different markets we'll have to see if that can really be an advantage but i guess one question i have for you guys is when you see this a and b share stuff where one person has uh the sole voting power what are you guys's thoughts when you see that maybe brad will start with you uh so for me a lot of people have a prerequisite companies have to be founder-led and i do not have that prerequisite myself unless there's something like this where the person with the vision of the company controls three quarters of the voting power if he leaves and if and if that voting power goes away then yeah that that's

a that's a large red flag for me just because this is pretty darn unique that he has over a little over three quarters of the total voting power of a gigantic public company um i mean yeah it's unique yeah that makes sense about ryan what do you have any other thoughts on that uh i mean Anytime you see that kind of control, he, in this scenario, the leader or whoever owns that much is integral to your investment. And I like him. He's done a really good job, and he's got sort of the vote of confidence from a lot of prominent investors. I know Bill Ackman backed him in 2010, which was really early on. Even Andrew Ross Sorkin had some sort of high praise for him.

uh so well we only invest when cnbc anchors no i like i like i like for sure yeah they invested too so that yeah that weighs it down maybe a bit maybe a bit all right valuation yeah so i'll hit this quick it's a pretty easy one market cap 72 billion dollars when i i looked i think it's a little bit higher today they're up today uh ticker cpng uh price to sales of six price to gross profit of 36, though. So we're looking at low gross margins here. Ryan will probably get into that. They're at an operating loss, but operating cash flow was positive. Their priced operating cash flow is about 240. So still really richly valued. They're spending a ton on CapEx. Even the margins were super negative a few years ago, but they're moving in the right direction.

So it looks like everything's going well for them. But the valuation, clearly, is at a premium, especially if you look at their most direct competitor, who would be JD.com. They traded like a sales ratio around one or lower historically. So you got to be really confident in Coupang's business model because there's uniqueness to each one of those. But JD.com has a very similar model and it's kind of strange that one will trade at six times the other. But Ryan, you want to hit earnings? Yeah. So they had $12 billion in revenue in 2020. That was growing 91% year over year and they had 17% gross margins.

So, yes, very. I mean, it's e-commerce. So all the stories you heard about early on Amazon, where it's like they were never profitable and they were kind of. Yeah. And I think if they try to build a UPS at the same time. Right. And this, you know, you hear the quote, your margin is my opportunity. Like that is that is very applicable to the situation. They had minus negative four percent operating margins this year. And then in 2018, they had negative 26 percent operating margins. So it is trending in the right direction. They had $300 million in operating cash flow, but they spent almost $500 million on CapEx. And they're building out sort of that logistics infrastructure. And I think they employ 15,000 full-time drivers.

Yeah, that's just the drivers. That's not including their warehouses. So they have tens of thousands of actual workers. But yeah, the 15,000 drivers is huge. Yeah, and so they have negative free cash flow because of all that CapEx. But I believe most of that CapEx is growth oriented and not really like maintenance CapEx. And then I had almost 15 million active customers up 26% year over year. Revenue per active customer grew 60% versus a year ago.

It's $256 per year. They did a cohort analysis, which I always feel cool saying cohort analysis. But it showed that for people to triple their spend, it used to take five years, I think, in 2016. And now it takes less than three years to triple customer spend. So the platform is becoming more crucial to accessing customers. That was such an impressive chart. Whenever you see those, you're like, oh, all right, this is impressive. But I'd say one note, too, on the drivers, they employ them full time and they only have a five day work week for each, which is a huge.

Well, it's not a huge advantage, but it's different than, say, like DoorDash or Uber, where they're just doing these subcontracting type deals. So it's more of an investment to try to keep these people like as employees. But Brad, you want to hit balance sheet and liquidity because it's pretty important for Coupang as they try to do a lot of investments going forward. Yeah, so this IPO was pretty gigantic. I mean, they raised $4.6 billion, and it pushed their cash position to almost $6 billion. So I mean, they got a lot of liquidity, $353 million in long term debt with $5.6 billion in total liabilities. So the balance sheet is pretty darn strong. Shout out for Coupon for making this section extremely easy for me. um they they report long-term debts so neatly and and uh yeah a lot of companies make you dig through the f1 or s1 this this made it really easy so thank you yeah i know it's a simple one to go over but i do think that six billion dollar cash balance is important i think they're trying to invest in singapore right now that that was a rumor um that they have job listings to go out

into singapore and they're gonna need to do a lot of capex uh over the next few years but luckily uh you know that capital as an advantage strategy that softbank always talks about is a little you know it's kind of bullshit rps excuse me uh but in this case if they have six billion dollars and they know they have they can invest with a good roi i mean you know that's kind of advantage that they have and they don't have to raise more debt or anything like that but that's going to do the the first half we'll get to the second half here talk more of the analysis and what we think about coupon cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about

malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back next up we have a new thing we're doing anecdotal evidence customer stories it's optional uh ryan came up with the last time so we're going to start out maybe start with you ryan i don't know you have anything i mean this one's kind of it's in south korea so yeah obviously i have not used the platform but I did watch a YouTube video

of someone that did use the platform and he was more he was doing sort of an analysis himself and he said that his friends use it and sometimes on returns they'll just pay you back and won't pick up the item because it's like a small loss for them and it just doesn't make

sense financially for them to go pick it up. So I thought it was just kind of interesting that they've sort of modeled it out where they're willing to take those tiny losses if the returns aren't that big. Okay, that's interesting. Brad? Yeah, I'm going to emphasize that this is extremely anecdotal. I have one friend from school who lives in Korea and moved back there. And I asked her if she knew what coupon was, and she did not. But it sounds like their delivery service does not

operate under the label coupon. So that makes a lot more sense now. And I would probably not worry too much about that. Yeah, it's, I don't think there's got to be any worry about brand awareness in south korea um yeah and i think we might we think about it as coupon but i think they might think of rocket delivery dawn those are sort of the names that yeah i'm not sure dawn might not be a brand but it may be the nighttime delivery yeah it might it might yeah they might be under different apps or services or something like that either way it's just these services and they got 15 million customers yeah i mean it's a no-go on any personal experience and a lot of people do use that amazon of x stuff for a lot of companies um but i think with coupon and like

jd.com it makes sense here uh it reminds me maybe the most of amazon of any company i've seen out there i know people talk about c limited jumia mercato libre um plenty of others this one is actually the most like them i think because of their relentless list to grow uh it seems like they really have the same core principles as amazon uh we'll see if they can come up with the AWS is the greatest business of all time, but maybe not. But next up is competitive advantages. Brad, what do you have? Yeah. So for a global company like this, I love how deeply connected the executive team is within the Korean political system. I mean, you have a district judge serving on the executive team. You have several lawyers that are well-connected in the Korean political

system. So whenever I'm investing in a country that I don't know a ton about, I generally like to see that their team is made up of insiders who have a much better feel on the overall climate of the country than I do. Yeah, people can kind of, you know, you see that and you think of the red flag in your head, like, oh, well, what are the morals of that? You know, and it's like, well, as an investor, that could be a good thing. Brad, do you have anything else? Yeah, and I actually own Ozon in my portfolio, which is kind of the Russian Amazon. And I'm saying that with air quotes and sarcastically. But yeah, one of the things that I liked about it is that they're owned by a private equity firm that is owned by somebody listed on the russian

oligarch list and when i say that to people a lot of the time they're like what are you talking about but that like that makes no sense that you would think of it as a positive but when i'm investing in a country that has a less certain geopolitical climate and i should not be comparing korea to russia because they're apples and oranges but having that inside connection i do see as a strength and some people may disagree with me and that is perfectly fine yeah regulatory capture That's great. Ryan, what do you have for competitive advantages? Well, as you mentioned earlier, it takes a lot of capital to get to where Coupang is at.

So that's sort of the big barrier to entry. It took $3.4 billion in private funding to get to where they're at now. I think $3 billion of that came from SoftBank. I forgot where I saw that. Yeah, it might have been $2 billion, but either way, a large amount. You have to get a lot of money early on to build that, and you've got to go at it fast. And now they can sort of raise all that publicly, right? I think they just raised whatever it was, $5 billion, and I know they're spending almost a billion on more logistics centers.

And they have operating cash flow to use it now, that they can use now too. Yeah, so, I mean, it just takes a ton of money to get going, and they had that financial backing from SoftBank. I mean, SoftBank is right. Like this took a lot of capital to do. It may not have been smart for them to give billions of dollars to both Uber and DoorDash and watch them compete away all their margins. But in this case, they might have been right. All right, I'll hit mine. It's similar.

I think the logistics network is the most important part of the business. So like Ryan said, 70% of the population lives within seven miles of the distribution center. Remember, South Korea is a tiny peninsula. and it really helps that they can charge lower prices while also doing 7 a.m delivery i just think that's i mean it's like 7 a.m delivery isn't just killer but it's if you're gonna have lower prices and basically unbeatable delivery there's no reason anyone would go anywhere else it's kind of like amazon even if it has you know the amazon you're not like excited to shop there but i mean you're just gonna go there because it's the easiest um and they have this quote here i

think ryan had on some of these too but this is from the s1 and this is direct quote korea is approximately one size the size of the united states geographically one percent excuse me and over 60 percent of the land is mountainous so given the scarcity of flat land mega fulfillment centers are typically built vertically and are more complex and time consuming to build than their counterparts and other parts of the mother markets like the united states i thought that was pretty indicative of how you know even that real estate is going to be tough to come around for someone to build a competing one um it's almost like there's going to be no way for someone to build that yeah and go look i encourage anyone that's interested in the investment to go look

up videos of like coupon delivery because you see like some of these towers of apartments are just super tall so you think about the economics of just going from door to door dropping and picking stuff up uh it's a lot easier than rural areas yeah and we want to get we don't get too bold up here on the logistics but one last note is that they this sounds simple too i bet a lot of other companies do this but they they use this i don't want to call it machine learning but i guess that's made the best way you know they have this system uh the software system that optimizes box placement in the delivery trucks and the anecdotally it's workers say that it saves them hours like every day of taking boxes out and stuff like that where you don't have to go dig to the

back it's like all right this one's in the back this one's right in the front it's just all optimized um and that's probably advantage as well but let's get to future growth opportunities brad what do you have yeah so so korea has the highest smartphone penetration in the world at 96 and i think because it's taking this position as a super app that we want to do everything and make people question how they live without us and all that stuff i i'm thinking about like jin yang from silicon valley and how he and how he just literally recreated netflix and google and Facebook and all these things, and just moved where they were operating somewhere else. And I'm sort of joking, but sort of not joking, where I think they could create a Tinder,

they could create a Peloton, they could create a GoodRx and an Upwork and all these things and just bolt it on to their super app and just be really successful with horizontal integration in Korea. And I think that is a really compelling growth opportunity in its own right. What do you think the most viable one is? They already have Coupang Eats, they already have, ryan mentioned that travel thing as well so maybe not that uh they also have coupon pay everyone has a coupon play no they have coupon pay as well and coupon play sorry yeah they have that i guess they have that as well everyone has payments uh are there any that you guys see as viable here i kind of you know i can't have trouble seeing it but if you have any yeah well i don't know which exactly

which one is the most viable but i think there's more nuance to i don't think they're just copycats I think a lot of people play it as like, oh, it's the Tinder of China. It's the Netflix of China or the Netflix of South Korea or something like that. Like there's – it's hard to – it doesn't exactly work wherever you want it to. Each culture is different. Right. Yeah. Well, I think maybe GoodRx – I don't know if GoodRx is delivery.

Brad, you know GoodRx. Is that – Yeah. That's not a great example because – or that's not a great example that I gave because our healthcare system is so messed up. And they're taking advantage of like differences between copays and listing prices and all that. So that's maybe not a great example, but a Peloton or a Tinder, I mean, I know it's probably not feasible for them just to create Korean Tinder. But using these ideas and using these monumentally successful products and kind of tweaking them in their own way to fit the Korean culture, I think it'd work out really well for them. And they've shown that they can do a lot of other things besides being this really successful marketplace and fulfillment network.

Yeah, a lot of optionality. Yeah, we might honestly be a little naive. I think a lot of this stuff might already be going on there. There's probably a reason that mobile penetration is so high in that country. I don't think it's because they have no apps on them. Yeah, and it's not like Coupang is not competing with anyone. Yeah. But, you know, they have the customers, the network.

All right, Ryan, what do you have? International expansion, I think this is probably the logical growth opportunity that everyone's thinking about. My only concern here is that, you know, we've talked so much about the benefits of having an e-commerce platform in South Korea just because of the density or the population density. So you've got to be really, I imagine they have to be very methodical about where they choose to go next. I think it's got to be super dense cities. Singapore. They're going to Singapore. That seems smart.

Yeah. I mean, I don't know the territories that well, but I see no reason why this business model and the benefits of this return and overnight shipping and stuff like that couldn't work in super dense cities. It's interesting because there's a lot of people that we know that are very smart that like C-Limited. I think C-Limited is less, they don't have a logistics network. So I don't know. I think there's a, I don't know enough about C-Limited. maybe they do but uh yeah if you can replicate this model in a lot of places but there's a ton of e-commerce competitors globally so it'll be harder yeah the other thing is like you know

going places where they're wanted uh you know i don't know how friendly uh some of the chinese competitors would be uh if they tried to launch in cities around there i don't think yeah no i uh i would be doubtful about the growth in china for sure all right what about you what's your growth opportunity i have coupon pay so a small part of the business now they don't focus on it much at uh in the s1 but it was spun out into its own unit in 2020 uh it's really just kind of some anecdotal evidence here apparently they had 10 million registered accounts as of june 2019 so that could be promising um i don't know what they're going to do with this i don't know if it's going to turn into a consumer app but you know there's there's some potential there maybe

if people are using their app every day i don't know you can toss on some of this stuff it seems like the the venmo type things and stuff are very commodity products at this point that you got to add on features to it so we can see there could be some potential there but again it's kind of tough to tell as just someone living in the united states yeah uh highlights low light spread so highlight is everything they they debut works so going back to my growth opportunity it's really easy for me to say just emulate services that are working around the world and it's a whole as brett and ryan were saying it's a whole nother thing for them to actually debut these products and execute in a country that's pretty darn developed already um and they've done so thus

far so props to them um and yeah impressive uh low light and i am picking here because there's not really a lot to not not a lot to be upset with or concerned about but e-commerce penetration at 24 it does make um expansion a little more a little easier and a little more seamless but it also probably gives them less total growth a smaller total growth runway than another country maybe like in egypt that has a three percent e-commerce penetration rate i would flip that back on you since it is so penetrated and they've gone from 18 percent uh market share in 2019 to 24 percent in 2020 and the solutions are so fragmented with no one that can offer these delivery solutions and like the amazon prime type membership don't you think that gives them maybe

an opportunity to take a ton of that market share well you know with that yeah i kind of see it both ways and i'm just i try i really try to find a low light here because there's nothing that they're doing that i that there's nothing that they're doing that i have anything but positive things to say. And I just think that the remaining 76% just might not be as much opportunity in terms of total dollars, but they do probably have that competitive advantage you're talking about by having a massive install base and several successful products and operating in a fragmented industry. So I definitely, I see it both ways, but yeah, hard to pick a really red flag low light here. There isn't one in my opinion. Right. Ryan, what'd you have on that?

Yeah, to Brad's point. I mean, if you think about the actual business model, it's great. And it even sounds a little utopian. Like, you order, it's there in the morning, you put whatever you don't need back outside, they pick it up. And it's like this really seamless process. But yeah, I guess, when we talk about like, how much more can they grow within South Korea? So they have, let's say, they have 15 million users, roughly. I think the population is just north of 50 million. 55, yeah. And 96% of those have mobile phones, let's say. Obviously, there's still a lot more users to be had. But I think the market's forecasting a lot of that growth. I think it's obvious because you look at JD.com or competitors like that, they trade at one-time sales.

I think people are assuming that the growth rate will – they will continue to grow. Hey, you're cheating. No valuation lowlights? I'm just saying, you know, when we talk about, you know, expecting whatever the TAM is, I think the market is in the same boat. But my lowlight, I don't see how they could be as profitable elsewhere. It seems like South Korea is like the optimal place to have an e-commerce platform like this. I mean, Singapore is the same. I wouldn't say the same, that's rude.

But Singapore is just a denser place, like not population-wise. But it's smaller. It's only like a 5 million population city. Okay, I'll take your word for it. I don't know the territory well enough. Other highlight, though, I would say management was exceptional. I thought Kim felt a lot like Bezos in terms of his vision for the company. Go listen to interviews with him.

He's definitely competent. felt like a visionary and he felt like he's energetic like that you know like he's got the energy of a bezos yeah all right uh i love the business model i love these i don't know my favorite i think my favorite network effect i think ryan knows this too is the economies of scale it's just so simple but it's uns it's unstoppable if you have a good management team behind it and a good value proposition um like the way they're trying to build out this network and then add things on top and people like you know we're doubt we've been doubters on like uh food delivering stuff like that in america but i think the way the advantage they have is one

south korea is so the cities are so dense with probably the population is so dense um sorry i can't never say that right whatever they have a one percent size of the land mass of the u.s and the population is super urban right it's like 85 lives in urban areas i think that gives them advantage to you to actually make coupon eats profitable and the fact that they directly employ these 15 000 delivery drivers also makes it a little bit of an advantage compared to someone like doordash or uber's model i don't know i think there's a lot of ways they can just add things on top like brad was saying but that is a little bit pie in the sky i love this quote from their shareholder letter or their s1 they said our long-term goal is to maximize free cash flow

while we're minimizing shareholder shareholder dilution that's perfect um now we gotta go do it i guess but i mean it's great that you know some companies we see that and then we just see them you know giving out 10 of their uh revenue as stock based compensation so i did like that a lot love the market share gains 18 to 24 low lights though like ryan said population um it's the tam concerns i guess uh you know eventually you argue they have to go out of their domestic markets so that's going to be a tougher proposition for them you know the model could work but it's just going to be way more competition yeah i think it's not as much a concern about the tam like you can tell they can definitely be very successful within south korea it's just there's some uncertainty

as to how well this scales outside yeah so yeah it's not well it's not the model right it's just that how it's received it's like and there's just i don't know the competitive landscape in other areas exactly exactly all right um more or less interested brad if you have anything else if not more or less interested on coupon uh i i really hearing that bomb super cam almost took this company public a few years ago i would have loved getting into this company before it had such a what is it 61 billion dollar enterprise value or something like that so uh yeah be back with the cash but they might be investing that also i don't know if that's smart 72 billion dollar market cap yeah sorry about that um so for me i i i really understand the argument that

they are aggressively sinking operating cash flow into new services and becoming as sticky as they possibly can and as vital as they possibly can but when you're doing six billion in revenue i'm sorry i keep guessing on numbers um when you're doing as much revenue as they're doing i mean you're still far away from profitability i look around the e-commerce landscape and i see ozone which again i own so i'm biased uh doing a small fraction of the of the run rate revenue they're doing and already cashflow positive. So I don't love the fact that it is so big and still so far from profitability, but everything else about the company is really impressive. So to me almost, I feel like if the growth rate slows down coming out of COVID-19 and people get less excited about

this, that is when I will really start to approach it as a potential long-term investment. So I guess it's a more interested, but not right now kind of thing. Yeah. It seems like valuation is a big thing ryan i'm assuming you have those concerns as well yeah i mean the valuation it's more concerns around tam i guess and sort of the uncertainty with international expansion for me uh i do like management and i think it's gonna look really really it feels like a young amazon um and it's gonna feel really really dumb if people are like everyone always talks about well if you could go back and invest in amazon what you know you always think you would have done it and then here we have this pitch coming in

that it's just Amazon again in a denser city. Yeah, in seven years if they're doing $100 billion in revenue we'll be like, damn it. Yeah.

But I also think about would I have invested in Amazon purely for e-commerce once they were already doing $10 billion in revenue? Maybe not. AWS was the really sexy

part of that business for me. And I guess you can, where is that for coupon? yeah well i guess another thing we're forgetting though is they do have a shopify clone ish they have a they have a subscription like software thing that they let people set up um shops online they have merchant solutions yeah merchant solutions i guess is a good way to call it so that could be higher margin they also are building out an advertising thing which is another

way that amazon makes a lot of its high margin revenue so i yeah i'm i'm more interested and they do have sort of all those uh call options if you will um i think i'd also have to understand sort of the macro landscape as well and just southeast or south korea in general uh because it's not an area i'm that familiar with all right yeah yeah i'm more interested again you know valuation is it's tough i'm i would argue the tan thing is not anything to worry about just because they have a lot of different business lines and if you look at this e-commerce in south korea they're gaining market share and south korea's e-commerce market is growing at a double digit rate i just really think they're building it out themselves like they're building out the

market they're making it legit kind of like in uh in western markets and even better um so yeah valuation is a concern yeah international expansion will be tougher for them profitability is also a concern but these are the things that again it comes back to those are things you argued about amazon in 2005 uh you can't just it's fun yeah like if you miss this after everyone's like it's amazon 2.0 you're gonna feel really stupid yeah but it's obviously a bit of a different situation yeah and it's again you know people make the comparison to jumia mercato weber and uh c limited but it's not this is actually the same business model um but yeah anything else guys brad one more thing yeah i mean you just heard about jamiya or jamiya or jamiya one of the two

uh pulling back i mean they're pulling back on investment dollars to approach profitability so when i hear that jamiya is the amazon of africa that just does not jive at all with that with that strategy and that approach to profitability i mean they're yeah amazon would not would not be doing that at all right now so i but i do see that yeah this could be a south korean amazon and two years from now kicking myself for not owning it yeah all right yeah the path of profitability for coupons pretty clear i mean yeah almost 400 or 300 million operating cash flow and then they're just investing so much back into capex yep yeah for sure that's pretty consistent all right before we go ryan what about the stock next week thread up uh 200 million dollar market cap i think uh

Poshmark competitor, right? It's more for like cheaper stuff, thrift store type stuff, resale and thrift store kind of items. Okay. We're going from $70 billion down to $200 million. Should be fun. Yeah. All right. That's going to do it for this episode.

Thank you all for listening. Brad, thank you for joining us. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Ryan and I, excuse me, I really rolled that one. We're general partners at Arch Capital. Clients at Arch Capital may hold securities discussed in this podcast.

Again, thank you all for listening. We'll see you next Sunday. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out.

Somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.