Groupon Is Going to Be Back With a Bang

Tanya 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) provides online retail services and is a global leader in the local e-commerce industry. The stock lost more than 70% in value from its IPO price of $20 in November 2011. The deals site has booked a profit just once since going public and is facing challenges to increase sales in line with the market expectations. However, I urge investors not to write off the stock from their portfolios. There is still much more to come from the Chicago-based company.

Total cash component positive

A company of the size and business similar to Groupon is generally measured by the price to cash flow (P/CF) ratio or price to sales (P/S) ratio because such startups struggle to book profits in the initial years after making a substantial initial investment. However, this figure is quite small for Groupon. The P/S ratio is 1.68, compared to other popular internet companies like Best Buy and TripAdvisor that are trading at a P/S ratio above 2. The net cash component of the company currently stands at $1.2 billion with debt being negligible. That means Groupon can make quick acquisitions incurring a small investment and hence increase its sales capabilities.

The main concerns revolving around the company are regarding user growth and monetization. Groupon has added just 1 million subscribers compared to 3 million a year ago. Margins have been continuously shrinking with Groupon spending more than it is earning. People deem the business model to be fundamentally flawed, underpinning that the daily deals business cannot consistently generate a profit.

Groupon has changed its model by venturing into more generic e-commerce areas by launching Groupon Goods, which already accounts for half of the company’s revenue growth. But competition is galore in this space too with Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) being the market leaders, so Groupon must find a way to differentiate itself.

Groupon – shifting its focus

Groupon is re-designing the small business world by introducing a range of products like point of sale solutions, customizable deal campaigns and credit card payment processing capabilities. Every company now is trying to gain more visibility by diversifying its offerings in handheld devices like mobiles and tablets. Groupon has made good progress in this aspect and has built a remarkable global scale of users, sales force and merchant relationships.

Groupon is increasingly shifting its focus from new customer acquisitions to current customer monetization. That looks well for the company’s growth in the short term. This strategy can be validated by looking at the company’s “take rate” measuring the percentage of profit per user transaction, which improved to 44% from 41% a year earlier.

The peer market

Amazon’s share price continues to rise despite the company posting a small loss in the June quarter. Investors still have enough faith in Jeff Bezos and his team, who are focusing more on investment, building warehouses and infrastructure around the world, even at the cost of profit. The stock price of Amazon has climbed eight-fold since 2009. Sales revenue, much like the stock price, has also grown considerably.

The main competition for Groupon has to be LivingSocial, another deals business site. Amazon owns a third of LivingSocial. LivingSocial has already started to eat into Groupon’s market share by making aggressive acquisitions and launching LivingSocial Shops, a business similar to Groupon Goods. Amazon’s valuations look unsustainable in the present scenario, but given its management efficiency and rapid growth of international operations, the stock is not too over-valued.

eBay is a global online marketplace founded in 1995. It has a strong growth record in the past, both from the expanding marketplace and impact from Paypal and its extensions. Paypal, a subsidiary of eBay, constitutes around 42% of eBay’s revenue and has its presence in 192 global markets.

Recently, eBay traded down 6% after the announcement of its latest results. However, a large insider ownership and upcoming catalyst can drive the stock to a high in the medium and long term. For example, eBay operates in other online markets like Stubhub and, which offer online event tickets. These type of business segments complement each other to strengthen eBay’s strategy of providing a growing commerce experience around the world and making global transactions much easier. Overall, eBay’s model has slowly diversified over the years and the company is still a stable bet for investors.

Groupon – leveraging its strength

Groupon has been increasingly trying to diversify away from the daily deals business into a comprehensive local commerce platform. The recent initiatives taken by Groupon like “Best of Groupon Merchants” collections, by highlighting the popular deals, will instill confidence in the small business owners and, in turn, builds a long lasting relationship.

Groupon is leveraging its strength of having more than 40 million email subscribers. It is also ramping up its international operations pretty fast. The success of Groupon will primarily depend on the cost structure of its European businesses. The stock performance in 2013 will depend on its ability to increase Groupon Goods' gross margins and deliver consolidated income growth across all operations. If Groupon focuses on the revenue generating part, I believe it has a long way to go and investors can get a substantial benefit in the long term.

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Tanya Kanodia has no position in any stocks mentioned. The Motley Fool recommends and eBay. The Motley Fool owns shares of and eBay. 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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