1 Stock to Buy, 1 to Avoid
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It seems the dark days of Groupon (NASDAQ: GRPN) are over. The company’s share price closed with a gain of 11.52% on Friday and has gone up almost 57% year-to-date. Groupon is a website that features discounted gift certificates offered by companies, and acts like a marketplace that connects merchants to consumers. The company allows its customers to deal directly through its website and mobile application. To make its offers more enticing for customers, the company is also offering perks to merchants e.g. Groupon Payments.
Mobile service a key revenue driver
North America is a leading marketplace for Groupon. In the first quarter, the company reported revenues of $601 million, up 8% from $559.3 million a year ago. Although revenues from North America rose, international revenue declined by 18%. In the North American region, sales from the use of the mobile application increased to 45% of total revenue from 30% a year ago, which shows that Groupon is getting a lot of traction from mobile. According to Reuters, Groupon expects revenue in the range of $575 million to $625 million for the current quarter, while analyst estimates vary around $616 million.
CEO and Co-founder Andrew Mason was replaced in February by Co-founder Eric Lefkofsky and board member Ted Leonsis. The market is bullish about this management change, and expects the new management to make positive changes. Groupon has a new strategy to pull potential customers as opposed to pushing them by sending a large number of emails.
The recent changes have encouraged Deutsche Bank Analyst Ross Sandler to upgrade its rating from hold to buy. He raised the target price from $6 to $10. Sandler suggested that Groupon’s billings can increase 20% by adopting a pull strategy and emphasizing the use of mobile devices.
High content costs
Other North American companies relying on internet advertisement have also been struggling to generate profits. Pandora Media (NYSE: P) provides radio services to people living in North America. In the first quarter of 2013, Pandora reported total revenue of $125.5 million out of which mobile revenue is $83.9 million, which is about 66.9% of the total revenue. Despite a minute increase in Pandora’s revenue, net loss continued to surge and reached $28.6 million, up from $14.6 million in the last quarter of 2012.
This increase is due to higher operating and business cost. Despite the continued losses, the market is still bullish on Pandora and according to a Forbes’s analyst, the company can post 48% growth in revenue and also turn profitable.
SIRIUS XM Radio (NASDAQ: SIRI) is the primary competitor of Pandora. While Pandora is struggling, Sirius has achieved solid revenue and profit growth. In the first quarter, Sirius reported revenue of $897 million, up 14% year-over-year and net income of $124 million up 15% year-over-year.
Apple’s announcement of iRadio streaming service seems scary for Pandora. Pandora currently has 70 million active monthly listeners. Apple announced its plans to launch an internet radio named iTunes radio, which will feature more than 200 stations and will come built into iPad and the iPhone. Pandora has one advantage as its app is available on Android, iOS and on Windows Phones, while Apple radio runs on iOS devices only. An internet radio service has room to grow due to increased usage of tablets and smartphones. Currently, Apple will have more effect on Pandora’s business compared to Sirius XM.
Sirius XM is expected to be threatened by iTunes radio in the long run. Sirius XM drives significant business from car radio subscriptions, and Apple could affect its car radio business as it will have iOS voice integration by 2014 in cars. Apple announced at the Worldwide Developer’s Conference that they will be integrating iOS in a number of automobiles from around the world. Honda, Mercedes-Benz, Kia, Hyundai, Jaguar, Opel, Acura, Volvo, Nissan and Ferrari cars will be the first in this list.
Groupon’s new pull strategy and the emphasis placed on mobile usage for customer convenience are the key drivers of the company’s growth. The growth in the US market is solid, but it needs to improve its smartphone offering for international users.
Pandora’s revenue is expected to rise this quarter, but it needs to rethink its business model and start performing on the bottom line or investors will lose confidence in the company.
Sirius XM is also under pressure due to a dwindling market and risks from the announcement by Apple. Therefore, growth in Pandora and Sirius XM stock seems improbable in the current circumstances. Therefore, I believe investors should buy Groupon, but avoid Pandora and Sirius XM.
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