- Based on the conversion metrics of app installs, I feel confident that a 15% growth rate is attainable for Groupon in North America.
- Expectations on Groupon are abnormally low among sell-side analysts from firms like RBC capital markets UBS, etc... and the growth/margin drivers imply a substantial beat.
- I’m raising my recommendation from a sell to high conviction buy, and I’m initiating a price target of $5.74.
I’m not going to lie, I anticipated that Groupon (NASDAQ:GRPN) would flop on its quarterly earnings report. Instead, the company generated a substantial revenue beat and margins were a lot better than street estimates due to improvements to its SG&A after exiting non-core markets.
Groupon reported revenue of $917.7 million compared to Q4 2015 consensus of $850.41 million, a 7.85% revenue beat. The company didn’t lower its guidance range on revenue, which implies that the company’s management team is fairly confident that even after exiting non-core markets it can sustain its guidance range of $2.75 billion to $3.05 billion for FY’16 with the analyst consensus sitting at the high-end of the range at $2.97 billion. Therefore, revenues are expected to decline by 4.9% between FY’15 and FY’16.
Overall, I walked away from the quarter partially confused as there’s very little evidence to suggest that management guidance will be accurate. Furthermore, the impact from exiting 17 markets isn’t completely comparable to FY’15. The international comps will likely weaken considerably as we progress through the year, as Groupon’s revenue base in FY’16 will be compared to a year where billings were supported by 45 markets as opposed to the current 28 markets.
Management didn’t indicate that they would exit out of additional markets, so international comps will level out. But among all that confusion there are some silver linings to top line growth whereas margins could improve due to the substantial increase in marketing and order discounts, which is offset by improvements to take rates and reductions to SG&A. I take this stance because Groupon isn’t communicating a strategy to ramp its profitability, but it seems highly probable, which explains the rampant speculation among buy-side/independent analysts when compared to sell-side commentary.
Here’s some of the recent commentary from sell-side analysts:
16E Revenue tweaked -0.7% to $3.05B, while ’16E EBITDA stays flat @$113MM. PT remains $4, based on 7X ’17E EBITDA. Maintain Sector Perform – This was a mixed bag with a few positive/neutral data points (NA Take Rate, Active Custs) and some negative data points (NA Local Gross Billings, Int’l). GRPN is in the early stages of a lengthy turnaround. The core business requires material investment in 1) Growing Active Customer Base 2) Improving Inventory Supply & 3) Enhancing the Core Product. These are not small tasks. — RBC Capital Markets, Mark Mahaney
Further, marketing spend deployed during Q4 showed potential signs of traction, with solid local growth despite reduced order discounts. And while we maintain our Neutral rating on Groupon shares, we will look for continued signals in the company's marketing efforts (Q1/Q2 weighted) & traction in acquiring new customers ahead of a potential rebound in the back half of 2016 and into 2017. $3.20 PT is based on our weighted average approach (EV/Sales, EV/EBITDA, EV/FCF). – UBS, Eric Sheridan
We are adjusting our estimates to reflect recent announcements that Groupon ceased operations in a number of countries, negatively impacting EMEA and ROW, and lower consumer electronics sales in Goods. We are reducing our PT to $3.50 from $3.65. Our $3.50 PT is based on 10x our 2017E EBITDA of $172M (was 12x previously). Our lower target multiple reflects recent multiple compression for SMID internet names. – Deutsche Bank, Ross Sandler
Flowing through the results, the increased shutdowns in countries announced in the past month, and incorporating updated guidance, we lower our 2016 and 2017 revenue estimates by 2% and 3%. In addition, we increase our 2016 adj. EBITDA est. by 6%. However, given how early Groupon is in its new marketing effort, our long-term estimates are largely unchanged. We maintain our DCF based PT at $3.00, implying a target multiple of 14x 2016 EBITDA. – Morgan Stanley, Dean J Prissman
It’s hard to articulate, but I’m fairly certain that Groupon’s management team is extremely conservative on its guidance for both adjusted EBITDA and revenue. They didn’t revise the range for revenue, which implies that expectations set by the sell side seem extremely beatable. In many instances, sell side analysts will adjust their financial models to reflect management guidance, which has been the case in this specific instance. Until there’s visible evidence that North America revenue will ramp considerably the consensus revenue estimates will remain in the $2.9 billion to $3.1 billion range. Key revenue estimates for FY’16 revenues are at $2.871 billion, $3 billion, $3.046 billion, and $3.098 billion by Deutsche Bank, UBS, RBC Capital Markets and Morgan Stanley respectively.
Groupon reaffirmed its guidance on Q4 2015 conference call:
Our 2016 guidance for revenue is unchanged. We expect our 2016 revenues to be between $2.75 billion and $3.05 billion. In our outlook, we're balancing the positive trends we saw in Q4 in revenue and active customers with our success in quickly reducing our global footprint by nearly 40%. As such, our previously stated annual revenue range remains and we expect the traditional Q4 heavy weighting to continue.
Therefore, the revenue from EMEA and ROW when combined should decrease revenue by approximately 40% depending on the size of these markets and whether international revenue is equally distributed by geography. My guess is that it isn’t, because the international revenue should be more heavily weighted towards more established markets in Europe than in other regions of the world where Groupon has established a small footprint. In other words, the guidance seems a little too conservative, which is what’s leading to the assumption that Groupon will report above consensus revenue for the foreseeable year. Therefore, I don’t believe a 40% reduction to international footprint directly translates into a 40% reduction in EMEA and ROW revenue when combined.
Source: Alex Cho
I come away with the impression that North America billings will grow by 15% as the incremental marketing spend should capture 15%+ active user growth. The average app install rate is appx. $4.23 per user, however Groupon is a more established app with more generic targeting requirements, which implies that CPI (cost per install) should be significantly higher (perhaps $10+). This implies that $500 million in incremental spending should result in 50 million app installs of which 10% should convert into active buyers that generate a similar billings rate that compares to pre-existing active users. This translates into 5 million incremental active users, which should bring the North America total to 30.9 million users. I anticipate international to decline roughly in-line with what sell side models suggest. However, what differentiates my assumptions is flat billings comps with a 313 basis point improvement to take rate, which should translate into 5.81% revenue growth. The SG&A should decline by around 20% in-line with Q4’15 trends due to the reduction of operations in overseas markets, and consolidation of various in-house business divisions in international markets. I anticipate marketing spend to increase by nearly 100% in-line with management commentary.
After making all the necessary non-GAAP adjustments I arrive at an adjusted EBITDA figure of $342 million, which is substantially better than FY’15, which is well above expectations set by sell-side analysts and management guidance. The current guidance range implies $80 million to $130 million, but assuming revenue figures are better than expected and take-rates improve, the company’s actual adjusted EBITDA will be 3x better than management’s current guidance.
I’m fairly certain that similar assumptions are embedded into buy side models, which helps to explain the massive run up in the valuations as Groupon stock was trading at distressed levels over the past couple of quarters.
Groupon stock is exhibiting some resistance against the 200-Day moving average, but given enough time I anticipate the stock to eventually break above the $4.15 resistance area. The Groupon stock is still undervalued as I arrive at 2020 revenue of $5.771 billion (assuming a 15% growth rate between FY’16 – FY’20), and net profit of $288.54 million (assuming a 5% net profit margin). I’m conservative on margins because retail names tend to be less profitable when compared to other Internet peers. Furthermore, valuations are more compressed for e-commerce names (eBay and Alibaba are great examples), therefore, I value the Groupon at $6.55 billion (22.71x net income) at the end of five-years and discount the valuation by 14.08% (which is based on its current weighted average cost of capital).
After crunching all of the numbers I arrive at a price target of $5.74 for Groupon stock, which implies a 40.59% upside from current levels. Of course, my long-term assumptions on revenue and margins are fairly conservative. Therefore, the Groupon stock could perform a lot better over the long-term. I’m reassigning my recommendation from sell to a high conviction buy.