Groupon Investors’ Selective Memory Warranted

By Tim Brugger - May 15, 2012 | Tickers: AMZN, GOOG, GRPN | 0 Comments

• Email
• Print

To think it was only a month and a half ago – give or take – when the most recent “accounting irregularities” rocked the collective world of Groupon (NASDAQ: GRPN) shareholders. After what can only be called a stellar Q1, Groupon’s earlier woes seem to be long forgotten. And why not? Management was clueless, they got called on the SEC financial carpet, and it’s safe to say all should be copasetic accounting-wise going forward. The recent appointments of senior Deloitte LLP and American Express finance gurus has put much of the earlier reporting problems to bed. Time to move on.

What Drove Q1 Results

As nice as it was to see positive income from operations for Groupon, there are a couple of other areas that actually support the meteoric jump since yesterday’s results were announced. Also it should be noted while Groupon headlines are screaming “A Profitable Quarter!,” that’s only partially correct. Net income – something most companies refer to as “profit” -- was actually negative after the provision for income taxes. Of course, that’s a bit of an accounting necessity – no pun intended (okay, maybe a little) – as anything else, and is sort of splitting hairs anyway.

But back to two of the more positive signs from Groupon – the SmartDeals technology taking hold and the dual positives of growth in North America and the seemingly unending opportunities internationally.

Real quick, SmartDeals gives Groupon customers a more personalized experience – matching offers to individual needs - something the company was lacking prior to its introduction. The technology is being heralded for the surprisingly huge jump in North American revenues for the year-over-year quarter. From an international perspective SmartDeals will also play a key role. “Will” because as yet it's not even available overseas – or in Groupon’s case any market not the U.S. or Canada. Even without SmartDeals, international revenues more than doubled to nearly $321 million and now make up over 57% of the company’s revenues.

And it’s the possibilities for even more international expansion that should have shareholders really excited. Without SmartDeals playing a role Groupon nearly doubled the number of countries the company does business in from 24 to 47 by the end of Q1 2012. Though overall selling and admin expenses increased – not surprising given Groupon’s growth stage – marketing expenses decreased significantly in both markets. Part of the increase in selling costs was the change in how much revenue Groupon kept vs. their merchant partners – Groupon's share was down 1.3%. 

Not mentioned often but certainly worth consideration are the opportunities Groupon has in the mobile marketplace. The recent exclusive - at least for a while - partnership with Nokia's new Lumia 900 phone is just one example. The agreement allows Groupon users to download an app directly onto to their Nokia smartphone while they're out and about. This is a very real opportunity for growth for the company that will be worth keeping a close eye on going forward.

The Concerns

So it’s all good, right? Well, not quite. Groupon – like many growth firms – has benefited from being the first on the block. Sure there are smaller, regional players – every community has them – but success breeds real competition and Groupon is going to find themselves in deep before long. This isn’t a surprise of course - Groupon clearly indicates one of the threats to the business is competition, particularly from big firms wanting to add to their core business lines. And those big firms are coming.

One of those making inroads is the (relatively) long established LivingSocial. The company is narrowing the monthly visitor gap with Groupon, and have the added benefit of Amazon’s (NASDAQ: AMZN) pocketbook and technology behind them. Google (NASDAQ: GOOG) – as is their wont – continues to expand their reach into seemingly all things technology. In this case the company’s Google Offers will go head-to-head with Groupon, and needless to say they have some clout.

As you’d expect there’s a lot going on with Groupon – most good and some of possible concern. But there’s no denying May has certainly been kinder to management and shareholders alike. If you’re a shareholder or would-be investor you can take heart from virtually every analyst following the company – the original IPO price of $20 shouldn’t be too long a wait. And based on the direction the company is headed - let alone the opportunities for continued growth - it's hard to disagree.

• Email
• Print
• Feedback