In 2008, when the markets tumbled, many investors panicked and sold their assets hoping to redeem the remaining value of their assets, but the smart investors remained calm until the markets hit rock bottom and then bought in on the cheap goods. Likewise, Groupon (GRPN) reported Q4 FY2012 earnings on February 27 2013 and the dismal numbers caused investors to bail, but I have reasons for jumping into, not out, of Groupon.
Groupon operates by negotiating with local and global businesses to offer low price deals for consumers on the premise that the large number of Groupon users who purchase these deals will offset the discount that the business allows. Also, Groupon owns Breadcrumb, a business that provides an electronic payment interface through Apple iOS iPad devices that allow for streamlined and easy payments for restaurants and drink businesses. Lastly, a less known tidbit about Groupon is that the company also operates a dating interface called Grouspawn that is completely free and allows couples who used a Groupon for their first date to apply for funding for their "Grou-spawn," if they decide to produce one together. Currently, Groupon has over 10,000 employees and operates in 48 U.S. states and has offices in Chicago, Palo Alto, Latin America, Europe and Asia.
Groupon reported $638.3 million in Q4 revenue and a loss of 12 cents per share, as compared to expectations of $640 million and a loss of only 2 cents per share. Analysts and investors were disappointed and reacted hysterically, causing shares to plunge over 26%. In the same quarter a year ago, the company reported $492 million and a loss of 6 cents per share. However, this was also the quarter with the highest gross billing of 1.52 billion. Gross billings refers to the dollar amount of the total groupons purchased by users. Furthermore, this quarter concluded the first fiscal year in which Groupon has generated a positive operating income of $99 million, as compared to ($67 million) in 2011. Q4 concluded a strong year, and the company is set to outperform in coming quarters.
Some concerns that Investors have:
Investors are concerned about Groupon's business internationally as 50.1% of the company's revenue is derived outside of North America. Q4 witnessed international revenue of $263 million, down $49.5 million from last year's Q4 international revenue. However, international revenues for 2012 totaled $1.1 billion, which is up from last year's $954 million, a 15% increase year-over-year.
Furthermore, Groupon has made it a priority for 2013 to invest in facilities and technology to expand globally, and the expansion has already begun with the acquisition of 10 businesses for a total of $54.9 million. $46.9 million of that was paid in cash, and Groupon expects "to continue to use cash to make strategic acquisitions." With a current ratio of 1.3 and a 0 debt/equity ratio, you can expect Groupon to maintain a healthy balance sheet in the future even in the midst of aggressive capital expenditure.
Also, analysts are concerned with the success of the Groupon Goods service that was initiated in 2011, and whether this could prove to be a source of growth for the company. Q4 saw $225.2 million in Goods revenue, up from $145 million in Q3 and $13.7 million in Q4 2011. However, the cost of Groupon Goods revenue was $218.6 million, so Groupon only received $6 million in profit. One of the reasons for this high cost of revenue was that in Q4 Groupon began to offer free shipping on Groupon Good orders greater than $15 dollars. To picture the benefit of Groupon Goods, let's take a look at year-over-year revenue growth. Total revenue for 2012 increased by $700 million year-over-year. Groupon Goods revenues alone increased by $433.9 million which equates to 62% of the revenue growth. As the infrastructure for Groupon Goods has been established in 2012 and Groupon has advertised Groupon Goods with the promotional deals, investors can expect Groupon Goods to further propel the company to new levels.
Additionally, investors wonder if Groupon can keep up with the shift in momentum towards mobile devices. In January 2013, 40% of total transactions were done through mobile applications, up 44% from January 2012. This increase reflects the user friendliness of the Groupon mobile application and the high sense of security that customers feel when they initiate transactions through their handheld devices. In an era where mobile technology and integration will make or break a business's prosperity in the future, this successful integration of the mobile platform into its core business is a huge milestone for the company. Now, users can purchase Groupon deals at anytime and anywhere. If co-workers get together and decide they all want to go skydiving, the Groupon mobile application provides an easy venue for those consumers.
Some further numbers to consider are that in 2012, Groupon had 41 million active customers, up 22% from 2011, and active deals in North America increased 300% to 37,000.
Groupon expects $560 to $610 million in revenue for Q1 2013 and operating gains to be between (10 million) and 10 million. Although these estimates are lower than the previous quarter and have been lowered after the report, I would not be surprised if there is a positive surprise for the next quarter. Groupon has invested significantly in global operations and Groupon Goods is still catching on in certain niches - even here in the United States. Furthermore, the percentage of shorted shares as part of the float has decreased 13.10% since January, indicating momentum in investor sentiment for this stock.
With the current status of Groupon in terms of finances, business strategy, and global positioning, the company is poised to succeed in the future. Revenues and profit margins will continue to increase, and the company will grow not only nationally, but also globally, as it seeks to make up for the lack of international expansion this past quarter. I believe the market over-reacted to the earnings report this afternoon, and soon the market will correct for that hysteria.