Expect Growing Pains for Coupang as It Expands Into Japan

Although Coupang (NYSE:CPNG) is one of the most intriguing names in business because of its remarkable ascent, I had reservations about the company when I last wrote about in April of this year. It wasn’t an easy article to write since I covered it when CPNG stock was a private equity play; thus, I had positive emotions toward it.

Nevertheless, I had to speak the blunt truth. Yes, Coupang has been a force to be reckoned with in its native South Korean market, dominating the nation’s e-commerce space like Amazon (NASDAQ:AMZN) has everywhere else. Further, Coupang impressed with its next-day or same-day delivery services, driving early interest in the initial public offering of CPNG stock.

However, the online marketplace seemed far too rich for what it was offering. What’s more, investors typically like to see profitability — or a pathway to such. With CPNG stock, the fundamentals gave the impression that prospective buyers would be waiting a long time. In April, I wrote the following:

“More significantly, despite Coupang operating on home turf and enjoying a cultural wall against foreign competition, it doesn’t have much to show for it on the books. When I wrote my private investing piece, a Korean newspaper reported that the company suffered operating losses of $940 million in 2018. According to Gurufocus.com, the loss was a bit higher at $1.05 billion.

“Admittedly, this is nitpicking. But the main point is that Coupang’s spending and expenses may begin to wear on stakeholders. In 2020, Coupang rang up $11.97 billion in revenue, up nearly 91% from a year prior. Yet net income loss was only pared down 32% to $475 million from a loss of $699 million.”

At the time, I suggested that Coupang could expand to other East Asian countries to help resolve the issue, particularly Japan. Sure enough, it’s doing exactly that, though this poses its own challenges.

CPNG Stock Still a Risky Bet

In my last write-up, I didn’t have the benefit of having Coupang’s first quarter of 2021 earnings report. But to be honest, nothing in the Q1 disclosure changed the narrative of the Korean e-commerce giant.

Yes, Coupang continued to ring up salivating growth figures, generating revenue of $4.2 billion. This was up a staggering 74% from the year-ago quarter. However, the net income woes continued as well, with the company inking red with a net loss of $295 million, a much worse showing than the loss of $105 million in Q1 2020.

Not surprisingly, the market started to get concerned, resulting in CPNG stock tumbling following the earnings report. Since then, shares have been on an upswing. Still, speculators may be wise to think carefully before jumping onboard.

As Nikkei Asia reported, Coupang founder Kim Bom-suk “stepped down from all positions at the group’s domestic unit,” choosing instead to focus on its international segment. Currently, Coupang earns nearly all its e-commerce revenue from South Korea, but it’s eager to expand overseas. On June 1, the company started trial operations in Japan.

As I noted in April, Japan makes logistical sense. While China is the bigger e-commerce market, Coupang will face serious competition there. With Japan, doing business will be hard but at least possible. Further, the infrastructure between South Korean and Japanese metropolitan centers are similar, providing some measure of familiarity.

However, the one nagging criticism is that if Coupang isn’t profitable at home, it might be a severe uphill challenge to be profitable abroad. Moreover, there’s the tricky issue about the geopolitical situation between South Korea and Japan. While relations can always improve, the iciness has historically imposed difficulties on Korean businesses trying to break into the Japanese market.

A Bit Too Much Like Amazon?

Finally, the other problem with CPNG stock is that the underlying company might be a bit too much like Amazon. As you likely know, the latter organization has courted controversy over the years, not only for destroying small businesses but also the manner in which it treats its rank-and-file employees.

In an alarming story from MIT Technology Review, Coupang’s incredible success could stem from management pushing the needle well too far. I’m not going into the gory details but the story is an eyeopener — one that doesn’t paint Coupang in a positive light.

This too could become a problem for CPNG stock. Millennials deeply care about corporate social responsibility. Treating workers like disposable assets is not something that this demographic will want to put their money in.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.