- Groupon’s stock is down over 40% in FY 2014.
- Groupon is not expensive at its current valuations.
- But uncertainties make Groupon a risky investment option.
Groupon (NASDAQ:GRPN) has been attempting to transition from its daily deals focused business into an e-commerce portal. However, the last few quarters have not inspired confidence in the minds of investors, and the stock has gone downhill consistently, barring a few rebounds. Groupon’s stock is now down by a little over 40% since the beginning of 2014, and by almost as much over the last 12 months. Though the stock’s valuations could seem attractive, there are challenges that Groupon will have to overcome. While some of its recent growth has been fuelled by acquisitions, a part of it might be stemming from the change in the business model. Further, the company’s recent focus on profitability raises questions about sustained growth in an increasingly competitive environment. Groupon is not expensive at current valuations, but it might be a risky bet right now.
Groupon Revenue Growth
For an extended period of time until Q4 2013, Groupon’s revenue graph looked like it had flat-lined. While YoY growth rates were falling at a brisk pace, even absolute revenue growth was sluggish. Q4 2013 was the first quarter to record a big spike in absolute revenue with YoY growth also picking up.
One point worth noting is that as Groupon continues to transition into more of an e-commerce portal, its revenue might get a boost because of the change in its business model. The company which earlier used to function as a 3rd party marketing platform, now also functions as a merchant. So, revenue growth could increase even if the billing value (value of goods sold) remains the same.
Further, Groupon’s revenue and billings growth have been driven partly by its acquisitions, primarily that of Ticket Monster (Korea based). The company operates in the same segments that Groupon does, goods, deals and travel. In Q2 2014, billings growth in the Rest Of World (ROW) clocked 145% YoY, driven by Ticket Monster, without which, growth would have been restricted to about 17%. The same was the case with the average customer spend which grew from $132 in Q1 2014 to $137 in Q2.
The question is, how much of the revenue growth reflects an upswing in Groupon’s business and how much of it is due to other factors like acquisitions?
Following Q1, Groupon signaled its keenness to focus on profitability. Some of the measures like increasing the order size for free shipping might actually hurt revenue growth. This could be especially risky now, given that Facebook and Twitter are poised to add to the existing competition in the e-commerce space which ranges from major players like Amazon and eBay to newer entrants like Google. Given that Groupon can’t afford to lose market share at a time like this, it could turn out to be the wrong time for such a change in focus.
Groupon Profit Margins
Groupon’s profitability has improved since Q4 2013, but remain lower than most preceding quarters except Q4 2012.
Groupon’s daily deals segment, being a high margin business, is its biggest hope in the bid to improve profitability. Groupon aims to achieve double digit growth in the segment in North America and Europe, Middle East and Africa (EMEA) regions by the end of 2014. If the company manages to do that, profit margins could get a boost. However, revenue from the local deals segment in North America and EMEA in Q2 2014 declined by 12.5% and 7.3% respectively.
It remains to be seen how Groupon’s focus on profitability will impact its results in the rest of 2014.
Groupon & Apple Payments
In a world where mobile users are increasingly valuable assets for an internet company, the fact that over 50% of Groupon’s transactions are completed on mobile is a positive. Viewed in this light, the company’s decision to adopt Apple’s payments platform comes across as a good move.
Groupon’s mobile app is one of the 25 most downloaded apps in Apples’ App store and is reportedly more popular that Amazon’s mobile app. Investors will be hoping that Apple’s popularity among smartphone users can drive transactions on Groupon.
Groupon currently trades at $6.7 a share. Groupon’s Price to Sales ratio of 1.57 is not expensive in absolute terms. Further, there are positives like the company’s increasing strength on mobile platforms and the opportunity in the tie up with Apple payments. However, Groupon’s path in the coming quarters is fraught with uncertainties both on the revenue growth and profitability fronts.
The volatility that Groupon’s stock has seen in its stint as a publicly traded company could also be discouraging for some investors.
Our Groupon stock analysis has more key financial highlights pertaining to the company. Based on the various factors discussed, Groupon could turn out to be a risky investment option right now.