Ellenbogen is the chief investment officer of Durable Capital Partners, a hedge fund that invests in growth companies. Prior to this, he was a vice president at T. Rowe Price, where he managed the highly successful New Horizons Fund.

Over the years, he has gained a reputation for investing in firms that have an ‘act two’. In other words, a second avenue of growth with a new product or adjacent market. He aims to anticipate these shifts and benefit from a company’s transition to a larger size.

Second chapters

Looking at his 44-stock portfolio, I see various growth companies that match this criteria. 

Gaming platform Roblox, for example, has amassed 112m average daily active users. With this massive user base, which is highly engaged and growing, the advertisement opportunity is simply enormous.

Right now, Roblox is posting losses on a statutory basis, which adds risk. But advertising should become an extremely lucrative second act that turbocharges the firm’s profitability. So I’m not surprised that Ellenbogen increased his Roblox position by 32% in Q2.

For the record, I also bought Roblox shares earlier this year.

Meanwhile, Duolingo continues to cement its position as the world’s leading language learning app. However, it’s also adding users to its maths, music, and chess courses, while embedding AI deeply across the entire company.

Ellenbogen also significantly upped his position in MercadoLibre (+155%). The Latin American e-commerce giant is applying for a banking licence in Mexico while growing its digital advertisement business at a rapid clip.

Finally, a new position was started in Veeva Systems. This is a leading provider of cloud-based software and data for the global life sciences industry. But Veeva is expanding into other industries, including consumer goods and cosmetics.

The Amazon playbook

For me, one of Durable Capital’s most interesting holdings is Coupang (NYSE:CPNG). This was Ellenbogen’s second-largest holding in Q2, with a 5.6% weighting.

Coupang is often called the ‘Amazon of Asia’, which gives a flavour of what it does. It dominates South Korea’s e-commerce and online grocery landscape, delivering products in a matter of hours. Over 70% of the population lives within 10 minutes of one of its logistics hubs.  

Revenue has surged from $12bn in 2020 to over $30bn last year. Wall Street sees this figure rising above $50bn by 2028.

So, what is Coupang’s second act? Well, there’s growing fintech offerings as well as international expansion. It also bought the Farfetch luxury marketplace last year.

But perhaps the biggest opportunity is its AI cloud computing service (Coupang Intelligent Cloud). The firm has long used its own AI computing infrastructure to improve operations, and now it’s opening this up to external clients. This is straight from Amazon’s AWS cloud computing playbook.

Due to Coupang’s aggressive investments, profitability has been patchy. It also faces stiff competition outside South Korea in both e-commerce and cloud computing. But a price-to-sales ratio of 1.65 is not a bananas valuation.

Better still, the company is expected to start ramping up profitability. This should see the forward price-to-earnings multiple fall below 30 by 2027.

I think investors should check out this growth stock at $28.

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Roblox shares: a great long-term investment?

Roblox is a gaming platform that allows users to both play and create games within an expansive virtual universe. Players are able (and encouraged) to make in-game purchases with the virtual currency ‘Robux’. With over half of under-16s in the US having used the platform, this is a great avenue for revenue.

Since listing on the NYSE, Roblox shares have looked like an exciting investment opportunity. The company expects an explosive Q1, pushed forward by 60% growth in active players and a doubling of revenue in comparison to last year. For 2021 as a whole, its expectations are a little more restrained. But roughly $1.4bn in revenue still represents growth of around 50% year-on-year. Impressive.

I’m also confident that Roblox shares would not be harmed by any negative pandemic developments. In fact, they could actually benefit if children are stuck at home once more (something we all hope doesn’t happen). The more likely scenario is that the world starts returning to normal in the coming months.

But this creates the very real risk that player numbers could start to decline to pre-pandemic levels.

Another risk is that Roblox shares are potentially overvalued. My colleague Edward Sheldon certainly thinks that its jump from a $4bn valuation last year to around $40bn poses a risk. This isn’t helped by the difference between its market cap and revenue resulting in a high P/S ratio of 27.

And don’t forget, all it takes is one viral gaming sensation to drive users away from the platform. Remember Fortnite?

Coupang: advantages and disadvantages

The performance of Coupang when it joined the NYSE was encouraging. The company is seen by many as the ‘Amazon of South Korea’, so demand was understandably high.

This interest comes on the back of a wonderful year for the relatively new company. Its revenue doubled in comparison to the previous year, reaching an impressive $12bn. It also managed to increase its market share from 18% to 25%.

However, both of these positives come with caveats. Its market share might be increasing, but strong competition makes innovation a must if it wants to avoid being smothered by the likes of Gmarket and WeMakePrice.

It also isn’t profitable. Despite its $12bn revenue last year, it actually ended up with losses of almost $500m. This is an improvement on the year before, but doesn’t guarantee that the company will become profitable any time soon.

This lack of profitability and the risk its competitors pose means I’ll probably hang back from Coupang for a while.

I’m willing to overlook the risk of overvaluation in regard to Roblox shares, though. Once the dust has settled over the next few days, I’ll probably be making an investment that I’ll maintain for the long term.

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Is this a growth stock I should consider for my own portfolio? Let’s take a look at the investment case.

Coupang: business description

Coupang is a South Korean e-commerce company founded in 2010 by Korean-American billionaire Bom Suk. Nicknamed the ‘Amazon of South Korea,’ it has a large market share within the South Korean online shopping industry. Across the country, it has more than 100 fulfilment and logistics centers in over 30 cities. These allow the company to provide next-day delivery for orders placed before midnight.

Coupang’s IPO price was set at $35. However, on the first day of trading, the stock closed at $49.25. At that share price, the company’s market capitalisation is around $84bn.

The company has some notable backers, including Japanese investment giant SoftBank, US wealth management powerhouse BlackRock, and US venture capital firm Sequoia Capital. 

Can Coupang stock keep rising?

Coupang’s recent growth has been impressive. For the year ended 31 December 2020, the company generated net revenue of about $12bn, up 91% year-on-year. This compares to growth of 55%, 69%, and 44% in 2019, 2018, and 2017 respectively. During 2020, it increased its market share significantly, from around 18% to just under 25%.

It’s worth noting that South Korea’s e-commerce market, as a whole, is growing rapidly. According to Coupang, total e-commerce spend is expected to hit $206bn by 2024, up from $128bn in 2019. That represents annualised growth of about 10%. This market growth should provide tailwinds for the company going forward.

Risks

While this all sounds promising, I do have some concerns about Coupang stock. One is that the company is still unprofitable. Last year, the company lost about $475m. The year before, it lost about $700m. The company says it’s not certain whether or when it will achieve or maintain profitability. This adds risk to the investment case. That said, Amazon was unprofitable for years.

Secondly, the company does have quite a bit of competition. Rivals include eBay-owned Gmarket, Naver Shopping, and WeMakePrice. Coupang says it faces “intense” competition and could lose market share if it doesn’t innovate.

Third, the company has recently faced some criticism over working conditions for its employees. Labour groups in the country recently reported that a Coupang delivery driver in his 40s had died from overwork. This is an issue to keep an eye on.

Finally, there’s the valuation. This looks quite high, in my view. Let’s say Coupang generates revenue growth of 65% this year (that’s my own estimate – I’ve used the average of the last four years’ growth to get to that figure). That equates to sales of about $20bn this year. That means the stock’s forward-looking price-to-sales ratio is about 4.2.

By contrast, Amazon trades on a forward-looking price-to-sales of ratio of 3.3. Amazon isn’t growing as quickly as Coupang. But it is profitable and also has its high-growth cloud business.

Coupang stock: my view

Weighing everything up, I’m going to keep Coupang on my watchlist for now. The company certainly looks interesting. However, at present, I think there are other stocks that are a better fit for my portfolio.

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