Is this Daily Deals Leader Worth Buying Now?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
2012 was a troubled one for Groupon (NASDAQ: GRPN), with its stock price falling ~76%. The company’s shaky business model and poor management execution is mainly responsible for this massive loss for the investors. Groupon witnessed a huge fall in its daily deals globally, which was down by ~21% on a sequential basis in the third quarter. On the brighter side the company's other segment – Groupon Goods-- is growing at a faster pace. However, it operates with a gross margin of just 12%, which impacts the overall profitability. Consequently, there is a huge burden on its cash flows, with its operating cash flow decreased by ~35% y/y in its last quarter. Even though the company is currently at a zero debt position, I feel the company needs a strong and quick turnaround for improving its whole situation.
Unstable Mobile Platform
One of the major disappointments for Groupon is its failure to monetize the increasing usage of mobile in the US. Mobile, which could have been a new growth avenue, remains poorly exploited. Although Groupon’s mobile access in the United States has seen partial improvement, the overall performance is still below par. The number of unique visitors has grown at a compound monthly growth rate of just ~1.5%, which is still below the total mobile internet growth rate of ~2.2%.
Losing the International Shine
Another major reason for Groupon's failure is its inability to strategize its growth activities in the European region, which accounts for ~80% of its international billings. The company was unsuccessful in planning the right incentive model to promote its franchises in this region. Moreover, Groupon's previous team in Europe rapidly expanded its business, and its billings grew from zero to ~3 billion annually in those two years. In this expansion process the company neglected the basic infrastructure, customer satisfaction, merchant selection, and focused only on the cheapest high volume deals. The company even flooded the small merchants with too many deals, which they were not able to handle, leaving customers unsatisfied. This resulted in poor ROI for the merchants, which led to a fall in repeat purchases. The company paid a big price for this with its deteriorating performance in Europe.
The Competitive Pressure
The industry continues to see immense competitive pressures, with new entrants flocking around this retail channel - the major ones being Facebook (NASDAQ: FB) with its “Gifts” and “Coupon” offerings, and Google (NASDAQ: GOOG) with a “new deal everyday.” Let’s discuss them in detail.
Facebook - The company added new sources of revenue in 2012 with its coupons and gifts, giving a tough fight to Groupon in this space. It launched Coupons for discounted offers that allow businesses to promote special discounts on their page. It is a simple tool that will help Facebook increase its user engagement. Users just have to “Like” a company page on Facebook, and the recommendation might come up under a Facebook ad. The new service is already showing great performance, with many company pages running out of coupons. Another feature is Facebook Gifts, which allows users to buy and send gifts to their friends without leaving the site. Under this service, the company has partners such as Starbucks and 1800-Flowers.com for providing various options of gifts. The service is already rolled out in the US, and the other countries will follow soon.
Google – The company recently offered deals through its Play Store in the holiday season. It offered different deals every day starting from mid-December to Jan. 1 2013. The company is always known for some attractive deals during the holiday season. Google will continue to offer tons of new deals everyday, including apps, games, books, movies, music, TV and hotels, etc, from the Google Play Store. With Groupon currently lacking in its daily deal performance, I feel this is a good opportunity for Google in 2013. Moreover, the company's PLA (product listings ads) is also showing solid performance for merchants with higher click through and conversion rates. We can expect Google PLA to contribute higher figures in its fourth quarter revenue since the ad format is additive and the conversion rates are ranging from 13% to 30%, which is higher than the comparable AdWords ads.
The Foolish Bottom Line
The European region for Groupon is still some quarters away from stabilization, and its mobile monetization continues to disappoint. With bigger rivals challenging the daily deal champ, I am skeptical about Groupon's ability to regain its market share. To sum up, I don't feel at this moment that Groupon offers a suitable risk-reward opportunity to investors. The company's core business of discounted deals is hitting the bottom, and it is trying to venture into new areas. The new segments are the online retail and payments, which are already flooded with competition with various players. Therefore I don't see any turnaround in the near term, and remain bearish on the stock despite its low valuations.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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