Groupon (NASDAQ: GRPN), has been making a constant and steady shift from flash deals to other businesses like travel and e-commerce. It is interesting to note that the biggest player in the flash deals business has decided to reduce its exposure to this segment. The move by Groupon reflects the overall state of the flash deals industry, with all major players either finding alternate businesses or being shut down. The new focus of the company has been its online goods or e-commerce business. New CEO Eric Lefkofsky, who took over earlier in the year, has often reiterated the company’s focus on alternate sources of revenue other than the flash deals.
Black Friday is considered the biggest shopping day of the year and Groupon did a fair bit on its part to ensure that the e-commerce segment could cash in on the holiday fever. The company announced its largest promotion effort ever just ahead of the Thanksgiving weekend. As a part of its promotion, Groupon gave away $100 million worth of Groupon bucks in order to boost black Friday sales.
According to a press release of the company on November 29th, the company gave select customers individual amounts up to $5,000 in Groupon Bucks. In addition, one customer was to receive $25,000 in Groupon Bucks to use towards a year-long Groupon shopping spree, enough funds to buy a local Groupon every day for a year, an unforgettable Groupon Getaways and a full wish list from Groupon Goods. The company also went to the extent of giving cash of $5000 in case the customer wanted something unavailable on Groupon. Rich William, senior vice president of global marketing for Groupon said "With more than 65,000 great deals and the biggest Groupon promotion ever, we're giving our customers the chance to skip the lines and save even more cash on Black Friday by checking Groupon first." The idea of the company to combine its biggest promotion effort with the biggest shopping day seems to have paid off handsomely for the company.
In another press release dated Dec 3, 2013 the company reported record sales for the Thanksgiving weekend. The company reported a 30% Y/Y increase in gross billings for the four day weekend from Black Friday to Cyber Monday. The move seems to have paid off well. However, how will this impact the investors? We shall now try and answer this all important question.
The company reports revenues under three segments consisting of Local (Flash deals), Goods (e-commerce) and Travel & other. Let’s now look at the contribution of the various segments to the company’s total revenues for the first three quarters of 2012 and 2013. The chart below displays the segment revenues for the above mentioned periods.
Based on segment revenue numbers from the company’s SEC filings
It is clearly visible that the company has seen significant increase in revenues from the e-commerce/goods. This segment has seen a 127% Y/Y increase for the nine months ended Q3 2013. The company’s increased focus on the goods segment has been gleefully accepted by investors with the GRPN stock having increased by close to 90% year-to-date. The e-commerce companies are often valued for their growth rather than the profits they generate. A case in point is that of Amazon, which has seen close to 0% profitability for almost a decade with a current market valuation in excess of $175 billion.
In conclusion we would like to restate that Groupon’s focus on e-commerce has been welcomed by investors. The increase in e-commerce segment revenues has been accompanied by positive movements in the company’s stock price. We believe that record weekend sales might give the Q4 2013 e-commerce segment revenues that extra boost resulting in further upside in the company’s stock price. However, we at Amigobulls love companies with strong cash flows and consistent profits and Groupon; we believe falls short on both the grounds. Though the stock might see significant upside as a result of strong growth in its goods business, we view the stock as a risky investment at its current price levels and hence hold a negative long term outlook on the stock. You can view our top stock picks here.
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