It is hard to follow Lee Ainslie (Trades, Portfolio)'s trades since he has nearly 400 positions. Which is why you have to ask why did Maverick Capital allocate so much of its portfolio Coupang Inc. (CPNG, Financial)? The guru investor has a position just shy of 5% of the shares outstanding and 30% of his total equity portfolio. The investment is valued at $1.38 billion. That is a big deal for a manager with ownership stakes in 390 stocks across his fund.
Ainslie's investment background
Ainslie is a superstar. Before founding Maverick Capital in 1993, he had risen to managing director at the late Julian Robertson's Tiger Management (Trades, Portfolio), where he and other former employees were nicknamed "Tiger Cubs" by the hedge fund industry. This tiger cub has done very well, outperforming the S&P 500 by 6% to 7% with 50% less volatility. Today, his firm has north of $12.50 billion under management. He is also part of the ownership group of the Washington Commanders. So there are plenty of reasons to learn from this guru.
Introduction to Coupang
Before seeing that Ainslie owns so much of the stock, I had never heard about Coupang. It is a South Korean company much in the same vein as Alibaba (BABA, Financial), Amazon (AMZN, Financial) or MercadoLibre (MELI, Financial) that sells virtually every kind of merchandise online. Coupang also has delivery with Rocket Delivery, grocery with Rocket Fresh, payments with Coupang Pay, entertainment with Coupang Play and quick commerce with Coupang Eats.
The company is like Amazon, Uber Eats (UBER, Financial), Maplebear's (CART, Financial) Instacart and PayPal (PYPL, Financial) rolled into one for the Korean market. According to Macrotrends, that market has 51 million people spending over $800 billion a year on consumer goods, more than half at the retail level and over $121 billion coming from e-commerce alone.
Coupang's rapid growth
Coupang has been growing rapidly, with revenue up 100% since 2020 to $22 billion. It has recently turned profitable, which seems to be a turning point that should continue to trend upwards. Now that the company has scale, it can finally focus on productivity and profitability.
The company has built over 100 fulfillment centers, covering over 47 million square feet and housing millions of products. To demonstrate its logistics excellence, Coupang promises to deliver goods for orders placed before midnight by 7 a.m. the following day.
Its business model is tailored for densely populated urban areas, and the company is planning to take the model to other Asian cities like Tokyo and Singapore, which have similar characteristics. If successful, this will open up a huge new channel for growth.
Financial performance and future prospects
In 2018, Coupang generated $205 million in gross profit on $4 billion in revenue. Over the last 12 month, the company generated $5.4 billion in gross profit on $22 billion in revenue, pushing $428 million to the bottom line. Moreover, Coupang has $4.55 billion in cash and just $2.72 billion in debt.
Gross profit continues to rise, up $1.7 billion in the last year alone, having gone from 18.9% to 24.7%. It is plausible that by this time next year, gross margins will be closer to the sector median of 35%. If that happens and the company continues to grow the top line at 11%, Coupang could produce $8.5 billion in gross profit on $24.5 billion in sales. With operating expenses growing much slower than gross profit, the company could produce a blowout quarter with earnings easily surpassing $1 billion.
Impact of inflation in Korea
In 2022, South Korea experienced its highest inflation rate in over 13 years with consumer prices rising 5.1% in November compared to a year earlier. South Korea relies heavily on imports for its energy and food needs and both have been rising. As much as 70% of Korea's food is imported and almost all of its energy.
The Bank of Korea has aggressively raised interest rates from 0.75% in April of last year to 3.50% currently - the highest rate its been since 2009. What is fascinating is that Korea has historically experienced even higher inflation.
Since 1960, WorldData found average prices in South Korea have risen by 7.8% a year, an increase of more than 9,000%. That is almost 10 times the total inflation we have seen here in the United States.
To that note, the real question is whether or not Koreans will continue to spend as much as they do annually on consumer goods. Because in another 10 years, prices look like they will double again.
The bottom line
To date, the stock has not fared well. Since going public in 2021, shares have fallen by more than 65% while the underlying fundamental value continues to rise.
Coupang has established itself as the largest online marketplace in South Korea. The company's Rocket Delivery network provides same-day or next-day delivery of more than 5 million unique items, and it claims that 99.6% of its orders are delivered within 24 hours. This is helped by the fact that 70% of Korean citizens live within 7 miles of a Coupang logistic center.
It has over 20 million active customers, which equates to nearly 40% of the Korean population. More importantly, Coupang is growing gross profits four times faster than operating expenses. Eventually that will even out, but by then the earnings could be considerably higher. At least that is what I think Ainslie is thinking and why his position takes up so much of Maverick Capital's portfolio.
