Monday, February 24, 2014

Groupon: Destined for Failure or Poised for Recovery?

I decided to play Groupon (GRPN) on their earnings report and bought in at $10.10 the day before earnings came out. I am still holding the shares because I believe the strengths the company reported outweighs the weaknesses.
The strengths in the annual earnings report (I am looking for long term growth) included raising revenue, expanding their mobile presence, and continuing to grow their user base. Revenue increased to $2.6 billion in 2013, as compared to $2.3 billion in 2012. This is due to a few reasons. 

First Groupon is gaining in popularity on the mobile market. It is the #1 free lifestyle app on the App Store with nearly 70 million downloads (around 9 million were from Q4 2013)

50% of global transactions were from mobile devices which is great for Groupon because there is a big movement from retailers to grow their e-commerce and mobile sales which Groupon already has an established position in. They must continue to grow their mobile users and create that "pull" factor that draws people to Groupon instead of bombarding people with emails or "pushing" groupon to them. How Groupon utilizes it's mobile section will be one of the reasons it either makes a come back or crashes and burns.

Active customers (in thousands) kept growing in 2013. With 44,877 active users compared to 41,049  and 33,742 in 2012 and 2011 respectively. Groupon did drop their average billing per active customer though with $ 134.01 in 2013 compared to  $ 143.88 and $ 186.75 in 2012 and 2011 respectively. If Groupon can focus on keeping a growing customer base while also increasing the average billing back to the levels in 2011 there will be a significance increase in revenue. Most of the focus from the most recent earnings report wasnt on the revenue or EPS (they beat analysist expectations for both!) for Q4 or fiscal 2013. It was on the drop in guidance that the company predicted for Q1 2014.

Groupon recently acquired Ticket Monster, a South Korean ticket and ecommerce company, for 260 million (100 million in cash and 160 million in Class A common stock). But how does this help Groupon? South Korea is one of the fastest growing ecommerce markets in the world. Ticket Monster provides Groupon a foot in the door with exposure to Korea and the whole Asia Pacific region. Ticket Monster also generated  more than $800 million of annualized billings which has the potential to add to Groupon's top line. 

Groupon also recently acquired the fashion discount website Ideeli. The company sells designer goods at a highly discounted price (up to 90% in some cases). But while fashion is a leader in ecommerce sales the retail industry has been struggling lately even in the midst of a highly promotional holiday season. Ideeli has never turned a profit and cost Groupon 46 million in cash. Of the two acquisitions I believe this is the more risky of the two. It has the potential to grow the scope of Groupon and help in add more high end vendors in the fashion industry, but it also has the potential to be a dud with flash sales declining in popularity.

Both of these acquisitions happened in January 2014 which is part of the reason guidance was lowered for the 1st quarter. They spent alittle over 300 million which will hurt the bottom line short term. Investors saw this lowered guidance as a step back for the company. But sometimes you have to take a step back before you take two steps forward.

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