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We believe that Q4 expectations for Groupon (NASDAQ:GRPN) have probably come down in recent days (company guidance calls for $690m-740m revenues and $40m-60m CSOI) following Groupon product head's departure and disappointing earnings/guidelines from Internet peers such as Amazon (NASDAQ:AMZN). Taking into account Groupon's impressive earnings miss track-record, it's no wonder that many investors see the Q4 earnings release as tricky and have decided to take some profits on the stock which is down 11% year-to-date.

As far as we are concerned, we believe that there are reasons (which we detail below) to be relatively upbeat about Q4 and/or FY14 even if we would not expect a blowout quarter due to the continuing impacts from Google email changes (sharp decline in email open rates) and the ongoing transition to the Pull model (mobile and marketplace) from Push (emails).

In all, Groupon offers in our view an attractive risk/reward heading into Q4 figures, as recent concerns have been well factored in the stock price while an earnings beat is possible and would probably spark a strong positive reaction.

Groupon could finally surprise on the upside

The first reason to be optimistic about Groupon's Q4 is that the local merchants business seems to have been healthy recently as illustrated by Yelp's (NYSE:YELP) solid Q4 figures.

But more importantly, we believe that Groupon's new business model is starting to deliver as illustrated by the group's Q3 performance (net income surprised positively with a $2.6m loss vs $14.3m loss expected, on revenues 3% below consensus). Now, more than 50% of North American transactions are sourced via mobile, a catalyst for smoother revenue growth and higher margins going forward. We are therefore confident that North America remained healthy in Q4 thanks to continued mobile traction.

But a major catalyst for the stock would be the recovery of its international activities, which have been a drag on Groupon's performances (sharp revenue declines and poor earnings in previous quarters). In our view, they could soon benefit from an accelerating momentum:

1/ In EMEA (26% of group revenues), Groupon has been progressing in moving the different platforms onto a single platform, much easier to manage, and in exporting the US business model. The group is also making take rates investments (i.e. accepts lower fees from merchants) in order to improve merchant selection and customer satisfaction. At some point, growth in the region could get back in the black and, in a blue-sky scenario, converge towards that of North America. The downside risk is pretty limited here, while the upside on group revenue and margins could be significant.

2/ RoW (13% of group revenues), which was heavily loss-making, operated close to breakeven in Q3 thanks to operations streamlining and cost-savings initiatives. Assuming continued efficiencies and a better top-line in Q4 thanks to recent investments in Asia and Latin America, RoW could surprise on the upside in Q4

In all, the healthy US business and a better execution in international markets are likely to enable Groupon to significantly improve its daily deals revenues and earnings soon, potentially as soon as Q4.

Source: Will Groupon Finally Surprise On The Upside In Q4?