Is Groupon A Good Investment?

| About: Groupon, Inc. (GRPN)

Groupon (NASDAQ:GRPN) has created a virtual marketplace capitalizing on the concept of e-commerce. The company has two major businesses; North America and International. Groupon has focused extensively on the domestic market which has been the major driver of its growth both in terms of operations and financial health. The company currently has 41.7million customers globally. Groupon has recently introduced a number of new business segments which are expected to fare well for the company in the long-term. Gateways and travel business are some of these new segments. The company primarily operates through providing discounted deals.

Groupon is relatively geocentric in nature and has churned disproportionately higher growth figures from North America. Although the CEO in the latest quarterly conference call highlighted the importance of international market penetration. He also pointed out plans to introduce a unified system to cater for both the North American and International market via a single playbook. Groupon went public in 2011 but since then its share price has plummeted 82%, only picking up recently.

First Quarter Results

The first quarter results were above analysts' estimates. The company performed much better on a number of financial and non-financial metrics sequentially although a relatively mixed result was seen on a year-over-year basis. Gross billing improved 4% on a year-over-year basis, North America saw 23% growth, while the international business was down 9%. Operating profits were up 12% in North America while only slightly up (4%) in the international business segment.

The bottom-line improved by 8% primarily due to the strong growth from North America (42%) although it was offset by declines in growth from the international business by 18%. It is important to note that despite the positive bottom-line, gross profit margin from a year-on-year perspective was down 14% but improved 15% on quarterly basis. Total units, a major non-financial metric gauging business performance was up 4%, mainly dragged down by a decrease in the company's international business (18% down), while the U.S. business witnessed an increase of 37%. The company has $1.2 billion on its balance sheet and is investing heavily in emerging markets.


It is important to realize that Groupon is a relatively new company, only four years in existence. In that time, it has grown massively in terms of clients and deal traffic. There are almost 60 million regional merchants worldwide and Groupon at this point in time captures only 1%, so the upside is tremendous. The company has ventured in to a business whose potential has not been tapped into, and it gives Groupon considerable room to grow. Considering the surge in mobile phones and technology-driven consumption in recent decades, a virtual marketplace (with the kind of offers that Groupon provides) is a relatively new concept.

One important figure this quarter was the number of mobile apps downloaded. The mobile industry has grown very fast and very quickly over the last few years especially with the inception of the Smartphone. 5 million apps were downloaded in the fourth-quarter, which increased to 7 million downloads in the first-quarter of 2013. This constitutes about 45% of North America's total transactions and is expected to grow in the future.

The interim CEO pointed out that the mobile customers are more active, healthier and they buy more, on average over 50% more. Management is very focused on the mobile sector and pointed out in the earnings call that they see mobile as an exciting avenue for growth. The company is trying to tap into the mobile segment, as more and more people are interacting with the world around them through their smartphones.


Analysts are divided if the latest quarter's result were just a one off or if it is a sign of a company that has turned the corner. I think Groupon's economics are very sustainable and growth-oriented. The company has ventured into uncharted territory by introducing the concept of a virtual marketplace providing goods and services at a discounted price. The growth prospect is huge. The company is currently operational in 48 countries. There is a lot of potential in the emerging markets with mobile phone sales booming and with increased consumer awareness and higher economic growth rates. The company is in a business of expanding the customer reach of other businesses. Some 60% of the U.S. merchants have renewed their contract on a monthly basis, indicating stronger merchant retention for Groupon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.