After its meteoric rise in early December that prompted me to comment that Groupon (GRPN) may be a bit ahead of itself, the stock has been trading in a fairly narrow band since December 18th. After going up over $2 in two weeks, it has now traded in a much more narrow band for just over another two weeks. It has broken above $12 and closed slightly above this nice round number to close last week, but hasn't moved outside this range after setting new highs almost daily earlier in December. Yes volume has been light due to two mid-week trading holidays, but for a momentum stock with a large amount of both long and short interest, this consolidation requires watching for a spike in volume and the next direction of movement.
There are some key drivers mentioned in Groupon's 3Q13 report, slides and analysis that bear close watching and interest when their next reports are filed. My personal opinion is this trading range is likely to continue until this quarter's earnings report in February. Let's look at some key areas Groupon is working on that could justify current valuations and even drive the stock higher:
Historically, Groupon has been a "push marketing" company, sending e-mails and alerts with their offers, deals and coupons. However, "pull", where the consumer seeks out information has both a higher conversion rate and margin. While also competitive and highly dependent on placement, "pull" is a good move while continuing to offer the push e-mail offers. It's pretty much a no-lose strategy, and if Groupon can continue to expand its share, this would be a positive sign.
Ongoing deployment of cash
Groupon closed the Ticket Monster purchase in the first week of January, utilizing $100M in cash as well as Class A shares for the purchase. This allowed Groupon to purchase a leading eCommerce company in a strong market without overly diluting the common stock with an all-stock purchase. This is an expansion into the Korean marketplace with a market leader done with both business and investor concerns in mind. While cash flow turned negative in 3Q13, a large part of this was investing activity like the Ticket Monster purchase from Living Social, which can drive long-term profitability and growth. Groupon must diversify and this is a good use of the large, $1.14B cash position it has been able to accumulate despite negative earnings. If other deals and development are coming, this could justify an increased valuation. This report mentions six businesses acquired in the nine months ending September 30th, 2013, including Ticket Monster. As Groupon deploys its large cash balance, future acquisitions are likely.
Rest of World (ROW)
As mentioned above, the Ticket Monster acquisition alongside other purchases continue Groupon's expansion worldwide. While the U.S. market has grown and was where Groupon "cut their teeth" so to say, this is a highly competitive and fickle market, with Amazon (AMZN) and others also competing in this space. While Amazon and others won't let Groupon expand internationally unopposed, the company has bought or partnered with leaders in its target global markets. Year over year unit sales in ROW were flat in the 3Q13 analysis (from the 3Q13 Investor Presentation) and as this picks up with the purchase of Ticket Monster and other acquisitions this could be a large revenue driver.
Ticket Monster looks to be an acquisition that not only adds value to Groupon, it may actually influence and change Groupon going forward. While calling it a "reverse hostile takeover" would be overstating the realities, Ticket Monster shows the product diversity and mobile focus Groupon is striving to implement across the board.
Rest of World margin and revenue figures have trended in a positive direction over the past two quarters, and if Groupon turns the corner and ROW becomes a profitable segment this could definitely drive the valuations we are seeing in the stock and at least the average to above average stock price estimates for 2014. Of course, this is not without risk, as all multi-national corporations face challenges as they expand into different regulatory and custom/culture situations, but Groupon appears to be buying talent and leadership as it expands.
While I stand by my earlier analysis that Groupon's quick appreciation in December was likely too far, too fast, the analysis that it is an investment trap needs to be hedged, and I am moving to a more nuanced view of the company. 4Q13 and 1Q14 results likely will be quite telling in light of Rest of World (ROW) growth and Groupon's ability to deploy its large cash holdings to diversify its offerings and implement new apps, "pull" deals and other drivers that warrant an even higher valuation. The prudent investor should consider the likelihood of revenue and profit growth and the already lofty valuation as well as Groupon's strategic moves made over the past few quarters.