I've Got The Goods On 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 know that many people in the financial world like to make fun of Groupon (NASDAQ: GRPN). I've heard Jim Cramer on his Twitter page saying he doesn't know if Groupon sells anything other than massages. Analysts have worried that gross billings growth is slowing down. 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 is essentially to suggest that retailers of all stripes heavily discount their products and services and let Groupon market these deals. While many have questioned the lack of a “moat” in this business, the simple fact is, this business is still growing.
However, Groupon Goods has the potential to change the retail landscape. The holy grail of retail is being able to offer an exclusive product or service. Since every Groupon Goods offer is exclusive, the company doesn't have to worry about competitors undercutting their pricing. 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).
Exclusivity Is Key
Physical retailers have to pay salespeople and customer service reps, and maintain expensive facilities. Target has been able to maintain a superior margin by carrying exclusive items, and focusing on clothing and higher margin sales. This accounts for the company's over 31% gross margin in the current quarter. In theory, Amazon has an advantage over Target, 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. The company recently reported a gross margin of over 24%, but investors may not know what gross margins to expect from Amazon until their distribution buildout subsides.
Groupon Goods offers customers 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. Think of Groupon Goods like a whole bunch of exclusive deals located all in one place.
Groupon seems to have an advantage over both Amazon and Target because of their two very different businesses. The company's traditional Groupon service is very high margin because of the lack of inventory. In the current quarter, the company's traditional business gross margin was 87.21%. Groupon Goods on the other hand is a fast growing, but lower gross margin (11.98%) business. Groupon's advantage is, they can leverage the high margin traditional business against the much faster growing Goods business. That is exactly what they did in the current quarter, with a combined gross margin of 31.97%.
While Groupon's 200 million subscribers can't compare to Facebook's over 1 billion active users, the difference is Groupon is built around commerce, Facebook is built around relationships. Traditional retailers like Target are a direct threat, as the company offers a much broader selection of goods than Groupon can. Where Amazon is concerned, they offer a huge selection, but have very little that is Amazon exclusive.
The best way to determine Groupon Goods value is by using a real world test. As of this writing, Groupon has a ASUS Transformer 10.1” tablet and dock bundle for $399 with free shipping. This exact same item through Target is $399.99, plus an additional $149.99 for the keyboard dock. Through Amazon the tablet is $314.99, and the dock is another $103.91. In short, the Groupon deal is 4.75% cheaper than Amazon and 27.45% cheaper than Target. Through Groupon, customers also get two years of 50GB of cloud storage for free. As you can see, Groupon Goods offers real values that neither Target nor Amazon can match.
The company said, “Groupon Goods has evolved into a second major category that our customers clearly love.” Groupon'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.
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.
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 24 times forward estimates. By comparison, Target sells for 12.75 times projected 2013 earnings, but is expected to grow EPS by 11.67%. Amazon is expected to grow earnings by 40%, but carries a P/E ratio of over 180. These figures indicate that Groupon has the lowest PEG ratio of the three at 0.89, compared to 1.09 at Target and over 4.5 at Amazon. 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. The Motley Fool owns shares of Amazon.com. 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!