Groupon: Potentially Good But Currently Risky!

  • Groupon has shown improved financial performance over the last quarter.
  • The current valuations are not too expensive.
  • The stock carries the risk of transitioning from deals to the new e-commerce business.

Groupon Potentialy Good But Currently Risky

Groupon (NASDAQ:GRPN) at $7.37 a share, is down over 42% since its 52 week high of $12.76 in September 2013. The company’s stock has fallen by about 10% in the last one week which saw a broad internet stock meltdown. However, Groupon’s stock price has been rolling downhill since its Q4 2013 earnings release which triggered bulk of the correction. We evaluate Groupon’s last quarter followed by a look at its prospects in the coming quarters and its current valuations.

Groupon’s Historical Performance

In Q4 2013, Groupon registered its strongest sequential revenue growth since listing. The company’s Q4 revenue of $768 million was well ahead of its guidance of $690-740 million and analyst estimates of $724 million.

Further, Groupon’s growth of more than 20% over the same period a year ago (Y/Y) marked its first double digit Y/Y growth in FY 2013. The same quarter also saw GRPNs first improvement in operating profit margins in FY 2013. To sum it up, Q4 saw Groupon shake off the inertia in its financial performance. Net profit margins would also have been in the positive, but for the writing off of Groupon’s investment in a Chinese company FTuan.

Groupon Revenue and Profit Trend

What Concerns Groupon's Investors?

Groupon’s last earnings release was greeted with a huge sell-off resulting in a 20%+ drop in share price as its Q1 2014 revenue guidance disappointed investors.

Groupon’s Q1 revenue is traditionally lower than that of Q4. That said, projected revenue excluding contributions from its latest acquisitions represented a bigger sequential decline than was seen in Q1 2013.

In Q1 2014, Groupon expects total revenue earned to be in the $710 – 760 million range translating to an 18 – 26% Y/Y growth. Of the total revenue, Groupon’s acquisitions are expected to contribute about $50 million.

The question Groupon will have to answer in the coming quarters is, can it sustain its confidence inspiring performance in Q4 of FY 2013.

What Could Drive Groupon's Future?

Apart from being easily replicable, local deals which used to be Groupon’s core business also faces competition from the likes of Amazon backed LivingSocial and Google offers. So, since the ouster of Groupon’s ex-CEO and co-founder Andrew Mason, his successor Eric Lefkofsky has had his work cut out. Diversifying beyond the high margin daily deals business has been high on the agenda.

The focus has shifted to Groupon’s e-commerce business and Getaway’s, its travel business, and so far the efforts seem to be paying off. Groupon’s travel business showed promise, growing by 46% in FY 2013. Further, its goods business has grown at a healthy 64% sequentially to account for 54% of revenue, up from 42% in Q3 2013.

To further boost its goods business, Groupon has recently acquired 2 companies. It acquired fashion, accessories and home decor retailer Ideeli, for about $43. Further, in Jan 2014, it acquired LivingSocial’s South Korean e-commerce business Ticket Monster, which earns revenue from similar streams, daily deals, products and travel offers.

Groupon has conveyed that it will be exiting China, a country that will not form a big part of its international plans. This, might actually be a good move by Groupon considering the huge competition it faces in China from the likes of Alibaba and co., and the fact that Groupon will have enough to deal with in its current transition phase.

Groupon Future Outlook

Groupon’s non-core business performance definitely justifies optimism. It has been able to achieve its primary objective of diversification. How the company as a whole performs after integrating its recent acquisitions remains to be seen.

It’s clear that profit making is not high on the agenda for Groupon. As is the familiar case with most internet businesses, the focus is revenue growth. The positive, so to say, is that profit margins are thin by design, and that is likely to continue.

To boost its e-commerce business, Groupon is allocating spends for TV advertising, an announcement that was met with a 2% drop in stock price. Further, while its recent acquisitions will contribute revenue, they will undoubtedly drag profit margins. Further, additional spends have been outlined to help these companies with their marketing initiatives.

Groupon Company Valuation

At a Price/Sales multiple of 1.91, Groupon is not expensive. However, the stock price is heavily linked to revenue growth, implying that a minor slip will trigger a repeat of the previous post-earnings thrashing.

However, if the coming quarters show that its goods business is sustainable and can eventually translate to profits, Groupon will be worth considering. At the moment though, Groupon stock is a risky bet albeit a cheap one.

To see Groupon’s latest stock price movement, click here (NASDAQ:GRPN)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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