Over the last few weeks I have been digging into the fundamentals of Groupon (GRPN) and I have to say they are not very exciting. That being said I decided to look at this stock in a Peter Lynch sort of way; from a consumers standpoint. In that regard, the stock seems to have some "legs".
From the eyes of a consumer here is what we have: Groupon offers discounts via alerts to consumers. The discounts can vary based on the item, the demand, and the manufacturers or retailers desire to move the product.. The consumer buys "coupons" to present to the establishment, or buys the product through Groupon to receive the discount.
Where Do Revenues Come From Now?
Groupon creates revenue primarily by keeping roughly half of the amount paid for its savings coupons.
Since GRPN receives revenue from the coupons they sell, the revenues come from the consumer. The need to grow revenues is paramount to the success of the future of Groupon overall, as had been noted in this article by Henry Blodgett, back in May of this year.
The capabilities of the new CEO will be important, as will the staunching of the bleeding of the international business. And the company will have to demonstrate that it can become a destination for consumer-driven commerce, rather than a "push" driven email deals company.
But the massive local opportunity outlined by Lefkofsky is real. And Groupon is in an excellent position to make this vision a reality.
This chart offers a broad overview:
The most recent fundamentals show these key points:
- YoY revenue growth from last quarter came in at a positive 4.70%
- YoY earnings growth has been negative and continued with a -.14 EPS.
- The company has zero debt which obviously gives the management flexibility and the ability to add new strategies to grow revenues, and of course become profitable.
- $1.2 billion in cash without debt is a positive statistic.
- 67% of shares outstanding are held institutionally which does give share price stability for this growth oriented company as well.
While the company has yet to become profitable, and must work on growing revenues, I believe they are better focused now than previously.
The issue that I have with the business model as well as the stock is that this company does not have a very wide moat. Basically, any company who wants to go after this sort of business can get into it with out too many major hurdles. To me, this translates into a business that might not have a long term appeal unless another company wants to get a jump on this business by buying the Groupon brand as well as established customer base by simply forking over a bunch of money to buy the company out. If I recall correctly, Peter Lynch would look at the popularity of what the company offers and what the "buzz" is telling us.
So What Is Going On Now?
Once again, from a consumers perspective, how is the company doing right now? On December 3, 2013, Groupon recorded its biggest four-day weekend of sales since the website was founded in 2008, with billings reportedly up 30 percent year over year.
What this tells me is that some of the strategic moves that the company has taken seems to be working. Of course we wont really know until the next earnings report, but if they do well during this time of year, perhaps the company and the stock can gain traction for potential investors and current shareholders.
In mid-November, the company embarked on a "big brand" coupon program as it took a page from RetailMeNot's playbook of offering "freebie" coupons.
As noted in this article:
Groupon unveiled Freebies, a new category on its online deals marketplace that offers digital coupons, promotion codes, giveaways and samples. It launched with more than 25,000 coupons from over 5,500 brands and retailers in North America, including Target, Best Buy, Nordstrom and Macy's. Next year, Groupon hopes to expand the business internationally and add in-store coupons. "This could have meaningful potential over time," said Sterne Agee analyst Arvind Bhatia.
The online coupon market is worth about $4 billion a year and when in-store coupons are included, the total addressable market increases to $28 billion, Bhatia noted, citing industry estimates.
These coupons are free. Consumers do not have to pay for them, and the program was marketed by Groupon as a way to give "back" to consumers who have purchased coupons from them before. A clever idea, with limited risk if any at all.
What makes the Freebies category different is the fact that it's a largish collection of brands offering discounts such as $25 off any $100 order, or free shipping on an order of $49 or higher, etc. Brands include Macy's, Nordstrom, Best Buy, Sephora, American Eagle, Crate & Barrel, Target, Tommy Hilfiger, and more.
The Macy's category alone comes with 266 deals, including $25 off a $100 Tommy Hilfiger order, free shipping on any Clinique order, 30% off Carlos Santana handbags, and more. Clicking on the deal will give you a shopping code and take you directly to the site, or it will take you to the sale site where the discount is already applied.
The idea seemingly has worked, since as reported, those holiday weekend sales by Groupon was up 30%. Of course not just this strategy can be the only catalyst. Groupon has completely redesigned its website to also include these "Freebie's" section, to become much more user friendly, and will draw its own following aside from the folks who join or sign up to receive direct emails.
Groupon will make money directly from the retailers, not the consumers with this strategy. This will give GRPN another way to increase earnings, which to date have been non existent. Revenues are also beginning to increase based on the dual approach of direct emails as well as the new website. Here is a snapshot of the home page after a visitor gives some very basic information (zip code, location, and some interests):
As reported here:
The new site, which took several quarters to build, makes it easier for people to search for deals among the more than 50,000 that Groupon has arranged with merchants and stored in its deal bank.
The search bar is displayed more prominently at the top of Groupon's homepage and when people type in search terms, automatic type-ahead suggestions appear, highlighting relevant deals. The new site also shows deals based on customers' interests, previous purchases and items bought by other people with similar interests.
The launch is a major step in Groupon's evolution under CEO Eric Lefkofsky, who took over from Andrew Mason, after the co-founder was ousted earlier this year following a string of accounting problems and a plunging stock price.
As Groupon turns 5 years old, Lefkofsky is leading a transformation that he hopes will turn the company from a provider of a limited number of heavily discounted vouchers via e-mail into a leading e-commerce marketplace that shoppers check regularly before making purchase decisions.
The company also launched its holiday store, "Grouponicus" for those hard to please folks on your shopping list. You know the ones. They repackage everything like the 50 year old "Fruitcake" gift that gets passed around from one hard to please person to another.
As noted in this article:
This year, Groupon is offering a winter holiday store called Grouponicus, which features unique deals that users can purchase for friends, so you can give the illusion of having an original gift idea while also finding a quick, relatively inexpensive gift. The site launched Monday (11/22) at midnight with three deals available for purchase: $35 for $70 worth of holiday merchandise at Tree Classics, $125 for a $209 skydiving jump, or $5 for a $9.99 digital download of Rihanna's new album, LOUD. Upcoming deals include $125 for a three-month wine and food club membership, $22 for an assorted 24-cookie gift box from Insomnia Cookies, $50 for $110 worth of services from Salon Rouge, and more.
The site will be offering a new deal every day for the next five weeks (right up to Christmas), totaling up to 650 deals between now and Christmas, and while most Groupon deals are only available for 24 hours, Grouponicus deals will be available for anywhere between three and five days.
The "Buzz" Looks Positive To Me
With many changes beginning to work, it seems like now would be the right time to invest in shares of Groupon, I have added a $10k purchase to our Young And Restless Retirement Portfolio for hopefully rapid growth in 2014.
The share price was $9.98 when purchased.
Keeping in mind that the company does NOT have a wide moat, I will be watching it closely.
If the changes made stop working, or shows signs of weakness, I will not stick around for the stock price to drop for Google to buy them out (Just my guess folks, not an arbitrage opinion).