Groupon (NASDAQ:GRPN) has long been associated with one word: deals. However, it has moved beyond daily deal business with its strategic change from a push model to pull model. The shift from a deals business to an online marketplace, has been well received by the investors, resulting in last 1 year stock gains of 133.27%. However, e-commerce is a saturated industry with top players like Amazon enjoying a monopoly like position in the industry. Thus, the transition is proving to be challenging as can be seen in the declining revenue growth trend and margins.
Taken from SEC filings of Groupon
Groupon Segments Outlook
The Local segment (deals), currently generating 51% of the revenues is down from 54% of revenue from the first quarter of 2013. Google’s new organized mail which sorts mail into primary, social and promotions categories has hurt Groupon’s deal business, as promotion mails are not in easy access of subscribers and therefore, viewed less. Owing to the declining popularity of the deals business, the company is shifting its focus to e-commerce.
Groupon has seen a positive shift in the goods segment (ecommerce), which now contributes around 42% of revenues owing to the shift in the business model. The transition is still in process, and entering a new business will have upfront costs, and might hit Groupon’s margins. The company is acquiring various start-ups including Blink, Ticket Monster, and more recently, Ideeli, a leading online flash fashion retailer for $43 million. These acquisitions though small, can help Groupon build a strong ecommerce platform.
Comparison of Groupon’s Growth and Profitability with its peers
|Revenue Y/Y Growth||Operating Margin||Net Income Margin|
The company has reported an average Y/Y revenue growth of 6% in the first three quarters of 2013. Investors seem to have ignored this lower revenue growth which is well below industry average mark. In an industry where companies are often valued for their growth rather than the profits they generate, Groupon is failing to measure up against its competitors. On the earnings front, the company has just turned green, reporting profits of 2 cents per share in the third quarter.
Comparison of Groupon’s Relative Valuation with peers
|Price to Earnings ratio (LTM)||Price to Sales ratio (LTM)|
Groupon’s current market capitalization of $7.62 billion seems to be on the higher side given the company is not yet consistently profitable (on a last twelve months basis). As the above table indicates, Groupon’s price to sales ratio at 3.1 is higher than that of industry including the much over hyped valuation of Amazon. Market estimates for Groupon’s forward price to earnings ratio stands at 40, which we believe is overpriced in comparison to the industry, owing to Groupon’s lower scope for revenue growth and profits. Currently, with an active user base of 43 million, Groupon will have to take steps to differentiate itself from its competitors, and build a long term sustainable business. We at Amigobulls are wary of Groupon’s potential and investors should thus wait till the company reaches a stable level in the ecommerce platform.
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