What Makes This Daily Deal Champ a Preferred Choice for Tudor & Soros?

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I like 13F filings. They tell us a lot more about what the investing legends are betting on. Looking at the 3Q 2012 SEC disclosures of my two favorites--George Soros and Paul Tudor--I found one thing common to both. They have both acquired a significant position in Groupon. Soros acquired 2.5 million shares in Groupon, while Tudor’s 13F showed 150,000 shares. Their other favorite picks were Facebook, Walt Disney and Zynga.

Let’s have a look at why these stocks are so appealing: 

<table> <tbody> <tr> <td> <p>Company Name</p> </td> <td> <p>EPS (Dec 12)</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>Market Cap</p> </td> </tr> <tr> <td> <p><strong>Groupon</strong> <span class="ticker" data-id="255351">(NASDAQ: <a href="http://caps.fool.com/Ticker/GRPN.aspx">GRPN</a>)</span></p> </td> <td> <p>0.17</p> </td> <td> <p>12.42</p> </td> <td> <p>1.95 B</p> </td> </tr> <tr> <td> <p><strong>Facebook</strong> <span class="ticker" data-id="273426">(NASDAQ: <a href="http://caps.fool.com/Ticker/FB.aspx">FB</a>)</span></p> </td> <td> <p>0.52</p> </td> <td> <p>36.81</p> </td> <td> <p>51.04 B</p> </td> </tr> <tr> <td> <p><strong>Walt Disney</strong> <span class="ticker" data-id="203310">(NYSE: <a href="http://caps.fool.com/Ticker/DIS.aspx">DIS</a>)</span></p> </td> <td> <p>0.78</p> </td> <td> <p>12.28</p> </td> <td> <p>85.36 B</p> </td> </tr> <tr> <td> <p><strong>Zynga</strong> <span class="ticker" data-id="270875">(NASDAQ: <a href="http://caps.fool.com/Ticker/ZNGA.aspx">ZNGA</a>)</span></p> </td> <td> <p>0.03</p> </td> <td> <p>110.50</p> </td> <td> <p>1.73 B</p> </td> </tr> </tbody> </table>

Facebook is becoming a success story in advertising revenue with its innovative sponsored stories on mobile/PC. With user base growth of 30% year over year, Facebook has remained focused on increasing its product portfolio in a short amount of time. The new launches of Facebook Exchange, Offers, and Mobile App Install make it a favorite among users and investors alike.

The addition of Lucasfilm by Walt Disney to its already strong brand portfolio has increased its interest among investors. Disney is reporting growth in consumer traffic to its newly opened Cars Land in California and New Cruise Ship launch in Hong Kong. To continue the positivity, Disney has planned new investments of ~$500 million in theme parks during 2013. 

Zynga has monetized its competitive advantage well, given its association with Facebook. Now its transition from web to mobile games platforms is defining its strategy, with new launches set for every quarter in the coming year. It includes more mobile and web games, online poker, and Casino games.

So what makes Groupon a favorite?

For the first time in the last four years Groupon, a daily deal champion, posted profits this quarter. Its disappointing 3Q 2012 earnings, mainly due to weakness in the European economy, have sent its shares trading at $2.73, down ~90% since its IPO (Nov. 2011). However, its revenues for the quarter were up by~32% (Y/Y). I see Groupon as one of those companies in a transition stage from a high-growth start to a viable public company. And, considering the long term growth fundamentals that still seem intact to me, I don’t see why it should fail.

Let us consider what can power Groupon’s Growth? 

Mobile transactions

For the third quarter ended Sept. 30, 2012, Groupon has marked one third of its North American transactions coming through mobile, an increase of 30% Y/Y. Keeping the traction along with continued growth, Groupon has partnered with Nokia to show daily deals via maps for Nokia Lumia users. With the rapid growth in the mobile space, and internet giants like Facebook and Amazon already cashing in, I think Groupon has already sensed the potential in this area. Its stress over mobile commerce and its launching of new apps to ease the payment system is an indicator of the company’s initiative towards it.

One shop for retailer’s e-commerce

Groupon’s CEO Andrew Mason has laid out plans of diversification beyond daily deals. With a goal “To become the operating system for local commerce,” Groupon acquired Breadcrumb and Savored to expand in (POS) services.

Savored is a discount meal and restaurant reservation provider with a client base of 1000 restaurants, which belong to the high end market. It offers discounts of up to 40% off of bills. 

The Breadcrumb acquisition is aimed to trap local hospitality businesses (bars, restaurants, similar retail businesses). Breadcrumb fully integrated with Groupon Payments and launched an iPad based point-of-sale (POS) service. The service allows merchants to swipe credit cards through consumers’ iPhones or iPads and iPod Touch. It offers the cheapest merchant fees of $0.15 (parallel to Square) per swipe, plus an additional transaction fee depending on the card used.  The service adds a competitive advantage for Groupon, as it allows easy transfer of payments in the merchant’s account within one day (which usually takes 2-3 working days).

Groupon’s new POS service will give it an advantage over its rival Google, as it does not have any sure-shot MCommerce service. Although the larger company launched Google Wallet (May 2011), which uses the NFC technology to pay through mobile, it failed from both the ends, i.e. merchants and consumers, due to lack of integration with popular devices such as the iPhone. 

Global footprint

Groupon is partnering with Tencent, the Chinese internet giant, to compete against similar sites and help improve its earlier failed version in daily deals. Groupon is also merging its Chinese JV Gaopeng with FTuan, a Beijing-based deal site that offers dining and purchase deals and holds a healthy investment by Tencent. The merger will create a multi-brand strategy that will strengthen Groupon’s position and increase its scale of operations. The integration could benefit both the companies from the shrinking market of Chinese deal sites, which came down to ~1000 from 3000 in the past year, as both companies hold the top position in their respective industry.

To sum up, I am quite optimistic about Groupon’s performance in the long haul, given its progressive outlook on new sources of revenue. Leveraging its marketing expenses, it is increasing its active user base at the rate of 37% Y/Y with a current score of 40 million (Sept. 2012). Additionally, its scale of operations with a reach in 48 countries, healthy merchant relationships, new product offerings, and improved ROI creates an entry barrier for new businesses. It already has a strong presence in the market, its new POS offerings are set to dominate the peer group, and market expansions will tune up its future growth. At a forward P/E of 11.38, I think the stock offers a good buy opportunity.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Walt Disney and Facebook. 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!

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