Groupon is Better Than Facebook or Google?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know it sounds crazy, but hear me out. Would you believe that Groupon (NASDAQ: GRPN) could be a better deal than Google (NASDAQ: GOOG) or Facebook (NASDAQ: FB)? While Groupon gets a lot of negative press, because most people assume that there is no moat around this company's business, the name has already been established as a daily deals leader. In the same way when people think of searching online, they think of Google, when people think of getting a deal, they think of Groupon. The company's most recent earnings report shows just how well this much maligned company is doing. Let's take a look at the company's earnings first, then I'll show you why the shares could be a better deal than either of its two major competitors.
Looking at the last time Groupon reported earnings, we see that revenue increased by 89%, and the company reported non-GAAP earnings per share of $0.02. In addition, the company saw active customers rise by 140% to a current count of 36.9 million. The company also hit a milestone in the first quarter, with over 100,000 merchants being served in a three-month period. Since 50% of these merchants were repeat buyers, we can assume that businesses are getting a good value when they offer a Groupon. The challenge that the company still faces, is that of needing size that they don't currently have. A good example is, while revenues were up 89%, cost of revenue increased 200%. While the company made a strategic decision to cut marketing expenses by over 49%, the cost to run the company's expanding business meant an increase in SG&A expense of 98.56%. If the company continues to expand, they should be able to spread their revenue across their fixed costs. This would improve the company's percentage of SG&A expense growth, and marketing expenses can be adjusted according to revenue growth.
Interestingly, the company is actually a more internationally focused business than at first glance. Many people assume that the company competes with the likes of Facebook and Google primarily in the United States. However, over 50% of the company's revenues are generated overseas. You can see the opportunity in international marketing, when you consider that North American revenue increased 74.6%, versus international revenue increased almost 102%. With international sales leading the way, looking at the company's financials paints a picture of continued improvement in profitability.
To make the point, Groupon's operating cash flow growth in the last quarter was astounding. With an increase of 367%, versus capital expenditures growth of just over 19%, you can see why the company had significant free cash flow. Specifically, the company generated free cash flow of over $70 million. This contributed to an increase in cash on the company's balance sheet to over $1.16 billion. Now that you have some background on the company, how in the world could I compare Groupon to names such as Facebook and Google?
It's All About Valuation
The reason I make this comparison, is according to the numbers Groupon could be a better buy at this time than either of its competitors. Consider for a minute, that Facebook sells for a P/E ratio based on 2013 earnings of over 45, and is expected to grow at about 27%. Google on the other hand, sells for a 2013 P/E ratio of 11.58, and is expected to grow at 17.59%. Groupon, has a 2013 P/E ratio of just 11.82 which is nearly the same as Google. However, Groupon is expected to see much faster organic growth, with most analysts expecting 30% plus EPS gains over the next few years. In addition, Groupon is singularly focused on offering deals to its customers. While Facebook tries to figure out how to make money with mobile, and Google tries to be everything to everyone, Groupon does not have these challenges. The company is naturally situated for mobile sales, to the point where their Groupon Now! mobile offering, is seeing one of the fastest ramp ups in company history. Through this mobile offering, customers can get localized offers based on where they are. In addition, Groupon targets customers for daily e-mails. Facebook has the idea to include these deals in customers news feeds, and Google does not really advertise their offerings. Both Facebook and Google have much larger audiences, but neither company is really targeting the space. For instance, it's too easy for a Facebook user to ignore these advertisements in the middle of their news feed. Where Google is concerned, the fact that these deals are not very well-publicized can be best summarized by the fact that I myself have used many Google products for years, and yet I've never seen a Google deal until today, doing research for this post.
While Groupon gets a lot of negative press, the company seems to be doing a lot right. If analysts are even close, in the next year Groupon stock could represent an attractive value. If investors believe in the company's model, they might consider buying shares today, in anticipation of the growth in the next 12 months. If the company can meet analyst expectations, this stock could be a better value than either Facebook or Google by the end of 2013.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.