Groupon (NASDAQ:GRPN), the diversified e-commerce company is slated to report its Q4 2013 results on the 20th of Feb 2014. If the company’s revenue guidance for Q4 plays out, this could be its best quarter in terms of sequential growth. The company that started off as a daily deal business has been transforming into a more diverse business by generating revenue from its new e-commerce business which it reports as ‘Direct Revenue’. We look at the company’s performance so far and its key business metrics, a brief look at its current valuations and what to expect from its next earnings release.
For the last six quarters, Groupon’s revenue growth has declined at a rapid pace without the revenue in absolute terms having changed drastically. The company’s YoY growth in quarterly revenue in Q3 2013 was down to 4.7% from 45% in Q2 2012. This phenomenon has largely been attributed to its attempt to reduce its dependence on the daily deals business. This phase has seen the company emphasis shift towards developing its online retail business to reinforce and partly re-invent its traditional sources of revenue.
To make things worse, the company’s profit margins haven’t given analysts or investors much to rave about. At 3.4%, the average operating margin for FY 2013 so far has been marginally lower than 4.4% for FY 2012. Further, since its listing in November 2011, the company has only managed to earn itself a solitary quarter of net profits.
|Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Revenue (in millions of USD)||559||568||569||638||601||609||595|
|Operating Margin %||7.1%||8.2%||4.5%||-2.0%||3.5%||4.5%||2.3%|
|Net Margin %||-0.6%||5.9%||-0.2%||12.7%||-0.5%||-0.9%||-0.2%|
Source: Groupon financials
However, Q4 has traditionally seen the company’s revenue growth peak both in 2011 and 2012, with revenues growing sequentially at 17.6% and 12.2% respectively. Investors will be pinning their hopes on this quarter to break the spell of poor revenue growth averaging -2.3% for FY 2013 so far.
In Q3 2013, the company earned more than 60% of its revenue from North America, with Europe, Middle East and Africa (AMEA) and Rest of the world (ROW) accounting for about 25% and 15% respectively. Since Q1 2012, the company’s share of revenue from North America has shot up from 40% to its current 60% largely on account of the growing e-commerce business which is functional only in the said region.
Groupon’s revenues come from two major segments:
• ‘Third Party Revenue’, primarily the traditional source of revenue (daily deals), is the company’s share of revenue earned by serving as a marketing agent for featured merchants. This segment is typically a high margin business and enjoys gross margins of about 87%.
• ‘Direct Revenue’, primarily from its e-commerce business, is the revenue it earns by selling products with the company itself acting as the merchant. Typically a low margin business, especially in its growth phase, this segment has gross margins of about 9% - 10%.
Groupon’s Q4 2013 guidance pegs revenue at $690 - $740 million and operating income at $40 - 60 million, implying a sequential revenue growth of 16% - 24.4% and operating margins of 5.8% - 8.1%.
If it does manage to report anything upwards of $700 million in revenues, the company will have matched its best QoQ growth since its listing. That said, one must note that the renewed confidence probably finds its roots in Groupon’s $ 43 million acquisition of Ideeli, a fashion retailer which could contribute $ 30-40 million in revenues this quarter.
Analysts’ consensus estimates see revenue at $724 million. At the moment, a lot hinges on the company’s ability to succeed in its online retail business which has been shouldering the company’s future expectations. Given that the company’s stock price has more than doubled in the last twelve months (LTM), it goes without saying that investors are expecting a lot from this presently shape shifting e-commerce company.
In its Q3 2013 earnings release, the company announced its plan to acquire Ticket Monster, a South Korean eCommerce business for about $260 million. The company operates in almost the same space as Groupon with revenues coming from identical streams, local deals, products and travel offers. The deal which could further boost Groupon’s revenues is expected to fructify only in the first half of 2014, but analysts and investors will be eager to know the progress on that front.
While, we are hoping that this quarters result gives us positive earnings and a P/E multiple to work with, as things stand, we have to look at a P/S multiple.
|Valuation||Q3 2013||Q4 2013 Est*||Q4 2013 Est**|
|Market Cap ($ billions), as on Feb 02, 2014||7.02||7.02||7.02|
|LTM Sales ($ billion)||2.44||2.49||2.54|
*LTM Sales factors in the lower end of its Q4 revenue guidance of $690 M
**LTM Sales factors in the higher end of its Q4 revenue guidance of $740 M
Groupon still doesn't make it to our list of favorite stocks. But given that there are reasons to be optimistic about the company's revenues in the coming quarters, at its present price and P/S multiple, it's not a complete discard candidate. Strong revenue growth coupled with some improvement in profitability could make it an option worth considering. We will discuss the company’s valuations further post its earnings release.
We had compared Groupon’s growth and profitability with its peers, and other valuation aspects of the company in an earlier article. Our overall stand remains rather same since there hasn't been an earnings release since then.
To see Groupon’s latest stock price movement, click here (NASDAQ:GRPN)