It's Too Easy to Hate This Company
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm sorry, but when this many people believe that Groupon (NASDAQ: GRPN) is such a terrible investment, I have to wonder if all of those so called “smart” people are wrong. While there is no question that Groupon's growth is slowing down, many people are giving up on this company and suggesting the company is failing. Based on the company's earnings report, the reality is growth is slowing, but not disappearing.
Groupon's model is pretty simple when you think about it. The company offers the ability to market goods and services to millions of customers as long as the company is willing to make a drastic cut in their normal profit margin. In theory, the company that contracts with Groupon is going to sell a lot more, but at a lower margin. The company provides tools to the business to calculate the net advantage of using the Groupon model.
Where Groupon used to primarily sell services, the company has recently moved into Groupon Goods where customers can buy goods that they would buy elsewhere. In addition, the company has partnered with Expedia (NASDAQ: EXPE) to offer consistent travel deals as well. Just to give you an idea of the value Groupon offers, consider a few current deals. The company offers a one night stay at The Lodge at Elk Creek Vineyards in Kentucky. The price for the Groupon is $81 and includes a one night stay, a cheese-and-cracker plate, and a vineyard tour. By comparison, looking directly on the company's web site, the cheapest price per night is $125 and if you add the cheese-and-cracker plate and tour, the estimated value goes up to $159. This means for someone who is already planning a stay at this bed & breakfast, they can snag a 49% discount by taking advantage of the Groupon. As of right this minute, 170 people have purchased this deal.
An example from the Groupon Goods business is the Mophie Juice Pack Plus Case and Rechargable Battery for iPhone 4 and 4S. The short version is to buy this item through Amazon.com (NASDAQ: AMZN) the best deal I could find was $49.99. Groupon sells this item for $42 including shipping and over 5,000 have been bought as of today. As you can see, there is real value in both the Groupon Getaways and Groupon Goods, and retailers and travel companies should be concerned. Now that you know there is real value here, let's see how the company did in the most recent quarter.
Ignore for a minute the company's previous growth rates. Pretend that you don't know that about two years ago that revenue was growing at a much faster pace, and just take the numbers for what they are. Revenue increased 44.77% and without one-time items EPS beat estimates by 33% coming in at $0.04. Operating income was $46.5 million versus an operating loss of $101 million last year. Gross billings were up 38%, and without foreign-exchange impact, billings would have increased 47%. Free cash flow increased 243% over the last twelve months as well. Last but not least, the company sits on about $1.2 billion in cash and investments and has no long-term debt. Oh did I mention that based on 2013 estimates the stock sells for just under 13 times earnings? So why isn't everyone running to buy Groupon?
Truthfully investors have a hard time with the Peter Lynch concept of “be here now.” Lynch used to say he would look at each company with the approach that he was hearing the story for the first time. He didn't want to look at previous information and feel swayed by prior positive or negative news. There are a few stats that investors know and I'm sure are making them nervous. The first issue is, while gross billings increased 38%, just a year ago this growth was over 900%. Even if investors look at gross billings growth in the fourth-quarter of 2011 they see 196% growth. It's hard to “be here now” when you see this type of massive growth deceleration.
A second issue is the company's active customer growth. Between the first quarter of 2011 and the end of the year, active customer growth was 119%. In the last four quarters this growth has slowed to 65%. While this is still impressive growth, sequential growth between the first and second quarter of 2012 was just 3.24%. Last year this same sequential growth rate was over 49%. If we move beyond the slowdown in these metrics, the company's outlook still puts the company within the range of analyst estimates for the next quarter.
Groupon estimates that third-quarter revenue will fall between $580 million and $620 million. Considering that analysts are calling for $580 million to $612 million in revenues this sounds okay. Where earnings per share is concerned, what the company reports will depend on how many shares the company has outstanding. This is a concern because the company issued nearly 3% more shares in just the last three months. If the company did this again, their current outlook calls for earnings per share of $0.02 and $0.05 per share. Analysts were calling for EPS of $0.05 just 30 days ago, and this still may end up occurring. You can see from these numbers the company's outlook isn't terrible either. Groupon has some positives working for it that other companies can't easily compete with.
Keep in mind that 38 million people are signed up and active members of Groupon. The company also says that one-third of North American transactions were completed on mobile devices. This is huge because competitors like Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB) have much bigger challenges making their business model work on mobile. Facebook has millions more users, but the company doesn't have a great plan of how to generate income from mobile advertising. If the company puts advertisements in the news feed, users are going to be annoyed if the advertisements become too prevalent. Mobile users normally want to look up something or look at their friends pictures, not a bunch of ads.
Where Google is concerned, while it's true that most people use the site to search, mobile advertising space is much more limited. Google is actually positioned better than Facebook on mobile as the company gets paid per click on search terms and doesn't require traditional advertisements to make money. The point is, while both of these competitors have challenges, the Groupon model fits mobile perfectly. The customer just wants to know if there is a deal near where they are. Since many Groupon deals are location based, this allows the customer to check Groupon and based on where they are, they may find a deal they can take advantage of. With good mobile growth, growing active users, and good cash flow growth, this Groupon deal is better than it first appears.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Google. Motley Fool newsletter services recommend Amazon.com, Facebook, and 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.