Groupon: Not so Fast
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Groupon (NASDAQ: GRPN) were jumping more than 12% on Tuesday after the company reported earnings and revenue well above analysts’ expectations. The news comes as an important relief for Groupon shareholders who have been hit hard in recent months due to concerns over the discount site's business model and sustainable growth rate. Over the long term, however, investors need to pay close attention to the competitive environment before deciding whether or not to invest in this company.
Wall Street tends to exaggerate both to the downside and the upside when reacting to earnings news -- maybe Groupon was punished in excess due to uninspiring numbers in the last quarter and the exponential rise we are seeing now may be an adjustment to that overreaction. The numbers were very strong, but long-term investors should focus their attention on the sustainability of the company's competitive advantage over the long term, instead of the quarterly financial figures.
Don't get me wrong, the company increased revenues 89% versus the previous year, and management forecasts an increase of between 40% and 50% in revenues for the next quarter. For a company that was being put in doubt by many investors and analysts recently, that's a pretty strong statement about the size of the opportunity Groupon has in front of it.
Investors need to remember, however, that strong demand doesn't necessary mean big profitability for companies and their shareholders. You need a competitive advantage in order to capitalize those opportunities and translate them into growing earnings and cash flows in the long term. Groupon is facing increasing competition in the middle term, and that's a reason for concern.
Many smaller companies all over the world are launching services similar to those offered by Groupon since there are almost no barriers to entry in this business. These companies can have a better knowledge of the local environment and more flexibility to develop interesting proposals for their customers. They probably have lower expenses too, because they don't spend so much in marketing or general and administrative expenses.
Groupon has a size advantage against those smaller players, but tech titans like Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) are also entering the business, and they are much stronger than Groupon.
Google launched its update for Google Maps for Android with support for Google Offers recently, and the new service includes offers like free dessert when the customer buys an entrée, for example. Integrating the deal service with maps, search, Gmail and all the other services that Google provides on a global scale is one important competitive advantage for the online search giant against Groupon.
Amazon is a shareholder in LivingSocial and is also competing in the space with Amazon Local. The online retailer is famous for being a very aggressive competitor. Amazon has brought big problems for companies in retail, book publishing and other industries; it can clearly be a hurdle for Groupon. Amazon is not afraid to reduce margins to compete, and they also have a pretty big user base and deeper pockets than Groupon.
From a long-term point of view, it really doesn't make any sense to frenetically react buying or selling Groupon based on the latest earnings release. The opportunity is big, no doubt about that. The main concern, however, is if Groupon will be able to build a competitive advantage strong enough to capitalize those opportunities.
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