Groupon: Don’t Overlook the Underlying Fundamentals at Work
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) stock prices have declined around 30% after its earnings release. Although the revenue showed a robust YoY growth of 45%, the revenues of $568 million were ~$5 million short of street expectations. We believe that the top-line miss was the main reason for the drop as investors failed to see the underlying fundamentals in work for Groupon. As we remain confident on Groupon’s business model with high leveraging opportunities and high barriers to entry due to merchant relationships and accumulated technology, we rate Groupon as a buy.
Improving cash fundamentals
Consolidated segment operating income is a metric used by Groupon to add operating income and stock based compensation to get a more holistic view of the underlying business. Groupon reported $72 million of Consolidated Segment Operating Income (CSOI) in Q2. North America CSOI was $43 Million while the International CSOI came in at $29 Million, both beating the record highs previously reported in Q1. While Revenue for Groupon only increased 1.6% QoQ, the CSOI has increased by 6.4% QoQ. We believe this was mainly driven by 24.2% QoQ decline in the Marketing spend which the company has been doing for last 5 quarters now. Groupon generated $49 million in FCF in Q2. This marks the 7th consecutive quarter of positive FCF for Groupon. On a TTM basis, Groupon generated $330 Million in FCF or a 243% YoY increase vs. TTM FCF of $96 Million at the end of 2Q11. At the end of Q2 Groupon had $1.2 Billion in cash and cash equivalents and no long-term debt.
Source: Company Reports and TheAnalystHub.com research
Revenue Take Rate increases in Q2
There has been major concern over the take rates among investors as they believe that the take rates are bound to go down as the competitive pressures increase. We are also of this opinion but we believe that the rates will go down due to product mix shifts (impact of Direct Revenues/Goods) rather than the competitive market pressures. We are positive on the improving unit economics for Groupon as Q2 marked the third consecutive quarter where GroupOn has shown a material increase in take rates.
Source: Company Reports and TheAnalystHub.com research
Strong Traction in mobile segment
Groupon management indicated that in July roughly 33% of the total North American transactions were completed through a Mobile device. This is in comparison to 30% penetration for April and 25% in December. This trend towards growing mobile usage has particularly benefitted Groupon Now! , which offers deals that are highly location and time-sensitive. We continue to believe that Groupon will continue to be benefitted by the increasing mobile usage in contrast to Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG) which rely heavily on revenues from advertisements.
Groupon disclosed its direct revenues at $65.4 million in 2Q12 vs. 19.2 million in 1Q12. Investors are particularly concerned about the direct sales to inflate the top line as the revenue is booked for the entire product in the revenues as opposed to only a portion that is booked through company’s traditional third party business. Though we believe that the sales of direct goods might lower the overall operating margins, we expect to see no affect whatsoever on the third party segment. We believe that the investors need to see the operating income as an absolute metric to derive the investment conclusions from now on in order to negate the effects for Groupon’s accounting practices. We see the current drop in stock prices as a window of opportunity to buy as investors overlooked the underlying fundamentals and positives from Q2.
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