Cryptocurrencies are having a moment. Bitcoin recently hit an all-time high, while the United States is passing legislation and embracing these new digital assets as a part of the financial world, which is driving further investor interest.
This does not mean cryptocurrencies are good investments in the fundamental sense, though. Why? Because cryptocurrencies do not generate earnings or cash flow. Growth in earnings and cash flow are what drive stock prices over the long term. Everything else is just hope.
Here are two technology stocks — Shopify(NASDAQ: SHOP) and Coupang(NYSE: CPNG) — with more potential than any cryptocurrency because of their potential for free cash flow growth.
Shopify’s goal is to make commerce easier for everyone. It provides software and other services to businesses, giving them the tools to compete with large retailers such as Amazon or Costco Wholesale. These include customer-built online storefronts, online checkout, shipping management, and in-person point-of-sales (POS) terminals.
It makes money mainly through subscription sales, add-on services, and payments. Subscription revenue was $2.55 billion over the last 12 months, up from just $19 million in 2012. Merchant Solutions revenue, which includes payments and other services, was $7.55 billion over the last 12 months, up from virtually zero dollars in 2012. Clearly, businesses love using Shopify, which is why it processed over $200 billion in payments volume over the last 12 months.
Last quarter showed the company’s ambitions to expand globally to Europe, where payment volume grew 42% year over year, outpacing overall payments volume growth of 31%. At the same time it is growing so quickly, the company is now generating consistent profits. Last quarter, Shopify generated $291 million in operating income, or an operating margin of 11%. As the business matures, investors should expect profit margins to move even higher.
Shopify’s free cash flow has begun to show enormous growth. Over the past 12 months, free cash flow was $1.8 billion, compared to close to zero a few years ago. As this free cash flow accumulates on its balance sheet, this should help drive value for Shopify’s stock price over the long haul, making it a better bet than any cryptocurrency you could buy today.
Image source: Getty Images.
The next stock is also in the commerce space, but is a little different than Shopify and at an earlier stage in its life. Coupang is a South Korean e-commerce platform that has taken inspiration from, and perhaps improved on, the Amazon model in North America. It offers its Rocket Wow subscribers free delivery in just a few hours or overnight if ordered by midnight the night before, with reusable delivery containers and quick fresh grocery delivery.
An enormously strong value proposition has led Coupang to gain a ton of market share on commerce spending in South Korea. Last quarter, revenue was $8.5 billion, up 19% year over year on a constant currency basis. Gross margin expanded to 30%, while operating income remained positive at $149 million. Profits are slim today versus Coupang’s revenue, but that is because it continues to invest and expand its offering in South Korea.
Over the next five years, Coupang’s free cash flow might begin to dip temporarily. In fact, it has already begun falling in recent quarters. Why? Because the brand is making an aggressive push to expand into Taiwan. So far, it is showing strong growth. Revenue is up 54% quarter over quarter and growing well into the triple digits, according to management on the last quarterly conference call.
Taiwan is a wealthy island nation that could be a great way for Coupang to expand its addressable market. In the short run, it will affect free cash flow as all the investments are set up. However, over the long term, it will help revenue and cash flow reach new heights.
Coupang’s revenue was $32 billion over the last 12 months. With continued growth in South Korea, adding new offerings such as food delivery, and the expansion into Taiwan, I think revenue can keep growing until it reaches $100 billion or more for the company. Not long after, free cash flow will follow. This makes Coupang a great stock for investors to own instead of cryptocurrencies.
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Brett Schafer has positions in Amazon and Coupang. The Motley Fool has positions in and recommends Amazon, Bitcoin, Costco Wholesale, and Shopify. The Motley Fool recommends Coupang. The Motley Fool has a disclosure policy.
