- Groupon reported a solid Q4 2013, but issued a weak guidance.
- Excluding the impact of acquisitions, revenue growth is weak as per guidance.
- Groupon is a risky bet, though not an expensive one, at current valuations.
Groupon (NASDAQ:GRPN) is set to report its Q1 2014 numbers this evening post market hours. The company has its work cut out after investors received its Q1 guidance by thrashing its stock price 20% lower. GRPN may not find a more opportune time to surprise investors, given that its stock is down to nearly half of its 52 week high of $12.76 in September last year.
Groupon Q1 2014: Estimates & Guidance
Analysts Estimate for Groupon: A revenue of $738 million and an EPS of negative $0.03.
Groupon’s own guidance expects revenue to range from $710-760 million for Q1 2014. The projected adjusted EPS ranges from negative $0.04 to negative $0.02 a share.
A sequential decline is not surprising when moving from Q4 to Q1 and the implied Y/Y growth rates of 18-26% are also on the higher side of GRPN’s achievements in the last 6 quarters.
However, a deeper look shows that about $50 million of projected revenue is expected from GRPN’s acquisitions in this quarter. Take that out, and sequential growth rates range from negative 14% to negative 8%, much worse than is usually the case in Q1.
Further, the slip in Y/Y growth rates to 10-18%, makes it evident why investors were disappointed by this guidance.
Groupon Key Financials
Groupon announced a strong Q4 to end FY 2013. The company delivered blockbuster revenue growth of 29% sequential (its fastest sequential growth) and 20.4% Y/Y growth, beating its own guidance as well as analyst estimates.
In terms of profitability as well, the company delivered an adjusted EPS of $0.04, up from $0.02 a share in Q3 2013. If one wanted to be kind, one could highlight the fact that the company doubled its profits. However, even after doubling, the non GAAP Net Income margin (excluding stock based compensation and amortization) remained modest 4.8%.
Groupon did show a significant improvement in its operating cash flows (OCF) and free cash flows (FCF), with Q4 accounting almost fully for the company’s OCF and FCF for FY 2013.
However, one look at the graph shows you that over the last 8 quarters, Groupon has not shown much of a direction financially. Q4 was a rare quarter that shook off the inertia, but it’s too soon to call if that was a one-off instance.
Groupon has been transitioning from a formerly deals dependant revenue stream to a more diversified one, driven largely by its e-commerce business. The good news is that e-commerce has been growing fast with its ‘goods’ segment growing at 64% in Q4 2013 to account for 54% of revenue, up from 42% in Q3 2013.
Travel, another one of Groupon’s diversifications showed promise, growing by a healthy pace 46% in FY 2013, albeit on a small revenue base when compared to GRPN’s other segments.
In December, 50% of the company’s global transactions were completed on mobile platforms, improving GRPN’s prospects as a mobile marketplace.
Groupon’s decision to exit China might also be a positive given that it has to take on the likes of Alibaba in that geography. As part of this move, Groupon wrote off its investments in Chinese company FTuan. If not for this write-off, GRPN would have recorded net profits in Q4 2013.
Groupon Q1 2014 Outlook & Valuation
In the early part of Q1, Groupon completed the acquisition of fashion retailer Ideeli and South Korean e-commerce business Ticket monster (formerly owned by Amazon’s LivingSocial) which operates in similar segments, deals, e-commerce and travel.
Groupon has pointed out that they will ramp up marketing spends to aid its new acquisitions. These acquired entities are expected to contribute about $50 million in revenue and make a loss of $20 million in earnings before interest, tax, depreciation and amortization or EBITDA.
Groupon has also allocated spends for TV advertising to boost its own e-commerce business, which again, will impact profit margins.
At its current price of $6.89 a share and a Price/Sales multiple of 1.79, Groupon’s stock is not expensive. However, the fact that Groupon is not likely to record any serious profitability in the coming quarters puts the onus squarely on revenue growth, making Groupon is a risky best. Especially so, given its rather weak guidance for Q1.
Clearly, as we started out saying, Groupon has its work cut out. It has to beat its own guidance to inspire some confidence in its growth trajectory. If however, investors feel that Q4 was a one-off performance, this stock could continue its descent.
To see Groupon’s latest stock price movement, click here (NASDAQ:GRPN)