As the CEO of Living Social departs, Groupon's (GRPN) primary competitor is left without its leader while Amazon (AMZN), the largest single holder of Living Social with a 35% holding, is once again looking for a way to break into Flash Sales. According to Bloomberg, Amazon has continuously been writing down the value of its holding. Now at $15mm, it was most recently at $25mm as early as June and $192mm two years prior. For Amazon, that's a decimal error. For Groupon, it suggests the #2 and primary competitor to Groupon is losing the battle of attrition, making Groupon the undisputed king of online flash sales. Any talk of 'flash sales' being a passing fad is not only premature but overly simplistic and extremely short-sighted. Groupon is not just another e-commerce company, it's an entirely new and revolutionary way of conducting commerce. Moreover, Groupon empowers local small business merchants in ways never before possible, thus contributing to this nation's core philosophy of supporting small business.
Groupon is the predominant Flash Sales commerce platform, sometimes referred to as online coupons, although the latter is a poor description of what Groupon does. Interested retailers now have to 'apply' to be listed on Groupon's platform, indicating how effectively Groupon has ingratiated itself in the mind of small retailers.
Thesis & Catalyst For Groupon, Inc.
As Groupon consolidates its position as the leader in flash sales, it has begun an aggressive acquisition strategy aimed at a lateral strategic expansion of its primary platform. Management has been openly communicating an expansion of its strategy into mobile and local offerings. This expansion of its platform involves technology one would usually see from Google (GOOG) such as contextual search, emphasis on mobile, and eventual broader expansion into discounted 'productized services'. This will continue to solidify Groupon as a destination platform, connecting engaged consumers searching for local deals and merchants looking for a broader channel to promote local offerings. With a possible "throwing in of the towel" by Living Social, coupled with an acquisitive Groupon, 2014 is likely to present investors with an expanding EPS and a rising stock price. Perhaps even a positive P.E. In the near term, I expect Groupon to be at $14-$15, a 30% gain from its current price.
At the current market cap of $7.7B, Groupon shows signs of the early internet hype when stocks with no reported earnings were being valued at astronomical prices. However, in this particular case, the first mover advantage of Groupon, the widening competitive edge, signs of trouble from Living Social, and Groupon's aggressive acquisition spree suggest a fundamental shift is taking place in how institutional investors value Groupon. There is a huge "goodwill premium" for achieving 'First Mover'. An additional premium is added when that position is consolidated, especially when the number two is backed by a giant like Amazon, as is the case with Living Social.
One of the positives of this company pertains to the fact that over 65% of the public float is locked up in institutional hands. Historically, institutions and insiders are long-term holders and therefore, they lock up their blocks of stock. An institutional ownership ratio above 90% would be problematic because of the risk of a sudden decision to unwind by one of those institutions. But at 65%, it's more likely for ownership to increase than decrease, especially in 2014 as Groupon becomes the go-to platform for consumers during a time when the tablet becomes the most important point of commerce for the internet.
To many, flash sales operators like Groupon present very little barrier to entry. However, once this has become the 'go-to platform' among mobile consumers, there is almost no chance for a new comer to achieve traction. If that were possible, we'd have seen Google and Amazon succeed where instead they failed. If Groupon continues to localize the experience and thereby improve the value-add to advertisers on their platform, much like Google, advertisers will prefer Groupon over other platforms for their coupon sales.
Revenue & EPS Outlook
Although the company continues to report losses ever since the IPO, 2014 is likely to result in Groupon's first profitable quarter as it expands laterally into multiple retail verticals.
A sudden and aggressive expansion by Google into flash sales and localized coupons, which isn't a stretch of the imagination considering Google already has the technology could put a tiny player up against the largest localized advertising company in the world. Concurrently, the present acquisitiveness of Groupon may result in difficulty integrating which will distract management at a time the company could ill afford any distractions. Key aspects of a Global Macro market operators overall analysis involve quantitative, fundamental and evidence based technical analysis. In order to keep abreast of these additional aspects behind this and any other trade, I invite you to keep an eye on Investent Capitalist, where I am at liberty to discuss non-fundamental variables in more depth.
Additional disclosure: I am presently long both Google and Amazon.