This Company Has The Goods
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 that many people in the financial world like to make fun of Groupon (NASDAQ: GRPN). I've heard everyone from Jim Cramer on his Twitter page saying he doesn't know if Groupon sells anything to analysts suggesting that gross billings growth is disappointing. However, there is a drastic change going on at Groupon, and for patient investors this company holds real opportunity.
Sell Someone Else's Stuff At A Discount, What A Business!
Groupon's original business model was pretty simple and predictably brought out competition. The company's business was essentially to suggest that retailers of all stripes heavily discount their products and services and let Groupon market these discounts. While many have questioned the lack of a “moat” to this business, the simple fact is, this business is still growing.
However, Groupon Goods has the potential to change the retail landscape.
They Just Need People To Sell To
Small businesses have always had one big problem: they don't have a way to get their product or service in front of enough potential customers. Groupon wants to help by having these businesses market their product or service through Groupon, with a deal that customers can't get elsewhere.
The holy grail of retail is being able to offer an exclusive product or service. This is part of why companies like Target (NYSE: TGT) are working with their suppliers to get products that are “Target exclusives.” This helps insulate the retailer from online competitors like Amazon.com (NASDAQ: AMZN).
A Competitive Advantage Retailers From Amazon To Target Can't Match
The problem with physical retailers is they have to stock shelves, pay salespeople and customer service reps, and maintain expensive facilities. Amazon has an advantage in that they don't have the over 1,700 stores that Target maintains. However, as Amazon has expanded they do have warehouse expenses that didn't used to exist.
Groupon gives investors the best of both worlds. Groupon Goods markets products and services that can't be bought elsewhere at the Groupon price. Groupon doesn't have to maintain as many warehouses because of their size, and they don't have to worry about a company like Amazon undercutting their pricing. The potential growth in this business should garner a lot of investor attention.
Impressive Growth And Less Reliant On International Sales
In the company's last quarterly earnings release, Groupon reported revenue up 32%, and they improved their net loss from over $50 million to just $3 million. While the company's gross billings were up just 5%, this was primarily due to a decrease in billings internationally of almost 12%, which offset a growth rate in North America of nearly 38%.
The good news for Groupon investors was, last year international sales represented 62% of total sales, versus this year they were less than 49%. By comparison, North American sales increased from 37% of the total to over 51% this year.
Competitive Threats
While Groupon's 200 million subscribers can't compare to Facebook's (NASDAQ: FB) over 1 billion active users, the difference is Groupon is built around commerce, Facebook is built around relationships. Whether Facebook wants to admit it or not, the identity of many sites is already so established that it won't change without massive advertising and push by the company.
Google (NASDAQ: GOOG) is also in the “deals” business with Google Offers, but this service is neither pushed by the company nor very easy to find. If investors want a reason to really get excited about Groupon's prospects, take a look at how the Groupon Goods business is doing.
The Future
The company said, “Groupon Goods has evolved into a second major category that our customers clearly love.” This might be the understatement of the century. The company's revenue from Groupon Goods increased 1,921% versus last year, and now makes up more than 25% of total revenues. Considering that this business just launched in the last year, this growth is nothing short of amazing.
You Mean People Don't Know About The Company?
With 37% more active customers on a year-over-year basis, it's a good bet that many of these customers became active due to Groupon Goods. The company saw a huge increase in free cash flow of 123% over the last 12 months. Groupon also keeps adding more and more deals, with more than 27,000 available in this last quarter.
The Best Retail Value?
Another reason investors should give Groupon a serious look is the company's relative valuation. In the next few years, analysts expect the company to grow earnings by over 27%, yet the shares sell for about 20 times forward estimates. By comparison, Facebook is expected to grow by about 29%, but shares sell for almost 45 times earnings. While Target and Google both sell for multiples close to their growth rate, they are both expected to grow by the low to mid-double digits in the next few years. Compared to Amazon's 32% growth rate and P/E ratio of over 150, Groupon looks like a steal. The company is much maligned, has huge growth, and impressive margins, but sells for a discount to its growth rate. Groupon is a company that has the goods, but the market hasn't realized this yet. Don't make the same mistake, add GRPN to your personalized Watchlist today.
MHenage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, and Google. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
