Groupon Has Been A Surprise Gainer This Year, But Will The Rally Continue?

| About: Groupon, Inc. (GRPN)

The daily deals business is getting crowded with some of the global giants venturing in. The social networking giant, Facebook (NASDAQ:FB) joined a couple of years ago, but has not been able to pose any significant threat to the more popular Groupon (NASDAQ:GRPN). However, following late entries by Google (NASDAQ:GOOG), with its Google Offers, and Amazon (NASDAQ:AMZN) Local, Groupon is about to face an uphill task in maintaining its domination of the daily deals business.

Interestingly, the giants are coming into contention just after Groupon dismissed its CEO and founder Andrew Mason. However, even a more interesting statistic is the manner in which the company has rallied this year. Groupon is up more 100% year-to-date, despite having posted unconvincing results in Q1, after which, founder and CEO Mason was dismissed. However, now the challenge that remains is to maintain this rally, or at least avoid dropping materially.

The second quarter did show some improvements in billings from North America, rising 30%. The company has also appointed Eric Lefkofsky as CEO and, Ted Leonsis as Chairman of the Board, which should help in curbing our uncertainty over leadership. This should offer some hope for investors as the company struggles to turn around its core market business, while leveraging with Groupon Goods.

Whilst Amazon Local is just about getting known in the grassroots, the giant online retailer has the best platform to challenge Groupon going forward. Amazon teamed up with LivingSocial in 2011, another daily deals company, which offers discounted products in Europe, Australia and North America. There are some stories suggesting that Amazon could even end up buying Living Social, which would definitely strengthen the threat posed by Amazon Local to Groupon's daily deals business.

There are also several other social selling start-ups that have received venture funding and are now competing in the deals business. The low barriers to entry have made it very easy for clones to enter the daily deals business. A good example is BuyWithMe, which is backed by Bain Capital Venture and Matrix Partners, while TownHog has received funding from D.E. Shaw.

Additionally, Groupon's other business unit, Groupon Goods, is facing intense competition from eBay's (NASDAQ:EBAY) Marketplace and Amazon. Groupon Goods has been Groupon's best performing unit over the recent past as the slowdown in the daily deals business continues. However, that progress faces a constant threat from ecommerce giants Amazon and eBay, which already enjoy a massive user base compared to Groupon.

How does Groupon stack up against the competition?

Groupon is still by far the company to beat in the daily deals business. However, the trend over the last few years has been anything but impressive. There are so many clones coming in, and even more shockingly, some of these clones have a better customer confidence than Groupon. Amazon, Google and eBay stand out as major threats, while Facebook's user base is a huge opportunity for the social networking giant.

Groupon seems to be fully aware of the risks associated with its daily deals business, and this is justified by its venture into ecommerce. However, as evidenced by Amazon and eBay, in order to succeed in ecommerce, it is necessary to have a payments business. eBay has PayPal, while Amazon has Amazon Payments. Therefore, if Groupon is to mount any challenge to the two giants, it may need to come up with a payments business to support the Groupon Goods unit.

The company already has a mobile payments services system, dubbed BreadCrumbs, and has also teamed up with Verifone and Ingenico to widen its mobile payments. Merchants can use these to process card payments instead of dongles attached to their iOS or Android-powered smartphones and tablets.

Groupon says local businesses have three options to implement its payments service on a credit card terminal: configure an existing Verifone and Ingenico device; purchase a Verifone vx520 from Groupon for USD 150 (with no monthly contract or fees); or rent a Verifone vx520 to own for USD 15 per month (for 12 months).

Therefore, will this be enough to help it compete with the likes of Amazon and eBay in ecommerce? I don't think so. As a matter of fact, mobile payment is still a grey area, which is yet to draw global popularity, in the scale of PayPal or Amazon Payments.

Additionally, both Amazon and eBay have amazing platforms that attract a bigger user base compared to Groupon's 41 million active customers as of Dec. 31, 2012. eBay on the other hand, has about 112 million and is tipped to reach 200 million by 2015. Amazon leads the ranks with more than 200 million active customers.


Groupon is up 102% YTD, and has achieved this at the back end of the dismissal of CEO, Andrew Mason, the founder of the company, and a deteriorating daily deals business. The growth in the Groupon goods business has played a major part in compensating for the slowdown in the daily deals business, while the appointment of Lefkofsky as CEO moves to stabilize the leadership of the company.

However, all these come at the middle of increasing competition in Groupon's core market, while the Goods business, will be facing an uphill task to get to the level of eBay or Amazon, which dominate ecommerce.

The bottom line is, Groupon has already rallied to levels that defy reason, when looking at its outlook and historical performance. The fact that Groupon has seen its daily deals business slow down due to competition from start-ups and the entry by some Internet giants like Amazon, Facebook and Google, puts in question its ability to challenge in ecommerce, which has been its best-performing unit over the recent past.

Therefore, it would be very optimistic to imagine the company continuing its rally at the current rate. I believe the current rally, which now prices the company's stock at a forward P/E ratio of 35.86, is unsustainable based on the current outlook.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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