Groupon: Signs of Resurgence
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Groupon (NASDAQ: GRPN) has emerged as a leading e-commerce company, with 37M active customers worldwide. It has performed well in an industry with significant competition by accruing the largest merchant and customer base and by accumulating technology with its eight acquisitions YTD. While the company has seen good growth in terms of increasing revenues y/y, its position in the stock market has remained dismal. We think that Groupon will grow its revenue again this year with its new system of deal targeting and expanding margins via sales and marketing efficiencies. The risk/reward profile looks attractive at the stock's current level and we believe the company’s fundamental strength will eventually be reflected in the stock price as well; hence, we recommend a buy on the stock.
Groupon: The Key Positives
Groupon’s Improved Deal Targeting for International Regions: Groupon’s system of enhancing its ability to send relevant and personalized deals to its consumers has worked in the US so far, driving national revenue growth in 1Q12 by 33% Q/Q. Groupon now looks at an opportunity to extend these enhanced systems to international areas, which could help Groupon increase its revenues from these regions (57% of its revenues in 1Q12) in the long term.
Decreased Spending on Marketing: Groupon has managed to decrease its marketing expense in the last five quarters, on both absolute and percent of revenue terms. From 1Q11 to 1Q12, while marketing has declined by around 50% ($230M to $117M), revenue has almost doubled ($296M to $559M). With back end systems that helped it optimize its marketing spending, Groupon has strengthened its position in a difficult-to-scale market (keeping in view the large sales force, merchant relations, subscriber base and required technology), ensuring its place as a market leader for a long time to come.
Increasing Mobile Usage as an Advantage: While mobile has adversely affected advertising based companies, e-commerce companies like Groupon have greater scope as mobile penetration increases. Groupon is trying to grab this opportunity by launching its applications on every known mobile platform. Mobile users will be Groupon’s best customers as they “pull” vouchers on their smartphones, leading to a higher probability of purchase than the customers who are “pushed” daily deal emails.
Groupon shares are down around 60% from its IPO price of $20 in November 2011. Groupon has underperformed its peers on the stock market with Groupon stock down around 60%, the highest in its peer group. Groupon is currently trading at a discount from competitors with a low PE ratio of 12.23.
While Groupon may not reach the premium PE of LinkedIn, Pandora or HomeAway, we still expect its valuation around the high-teens and would therefore rate this stock as a buy.
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