Groupon's (NASDAQ:GRPN) stock fell over 15% in trading following the company's Q4 2013 earnings announcement. Even though the results were generally good, the outlook didn't appeal to the investors. The key message was that the company is still trying to find the right strategy to create a long-term sustainable business, and therefore, certain investments might put short-term pressure on its profits. We believe that the stock price corrected itself to some extent to better reflect the reality. While gross billings grew in North America and the EMEA region, the rest of the world saw a decline. Even growth in the domestic market is not as brisk as before. Groupon needs to cut down on irrelevant emails, focus on activating mobile subscribers and reduce the number of "null" searches by enhancing its catalog of deals.
We are reviewing our price estimate for Groupon in light of recent earnings and will have an update ready soon. Our current price estimate for the company stands at $6.25, implying a discount of about 25% to the market price.
Groupon Still Finding The Right Mix
The biggest improvement that Groupon can make to its service right now is increasing its relevance and utility. This implies that customers should be able to get desired deals at or near the time when they intend to use them. Currently, the company sends its subscribers over 250 million emails everyday and a large number of them are irrelevant. Also, emails tend to be less engaging and Groupon would be better off directing its subscribers to its app and website. The company is already doing this, which is evident from the fact that its mobile app witnessed more than 33 million downloads in 2013, and mobile accounts for almost half of its total transactions now.  Also, it is encouraging subscribers to browse through its website and find the deals in real time. However, far too many of them are still not aware of this facility and instead rely on emails. This suggests that Groupon needs to ramp up its marketing which may put some pressure on its margins in the near term.
The user experience can also be affected by "null" search results, which are only going to reduce with time as the company gets more merchants to its website. In order to build a sustainable business, Groupon will need to ensure that its customers keep coming back for more. This can only happen by increasing the relevance, flexibility and utility of deals. The revenue growth will suffer temporarily as users shift from email marketing to mobile app and real time browsing, but from a long-term perspective, this is the right way to go. The company could try to speed up the time it takes to activate a new customer who downloads its app. This will again require higher marketing spending, thus creating near-term cost pressure.
Groupon's focus is rightly changing from customer acquisition to customer retention. Finding the right mix of deals, take rate and marketing strategy is going to take some time.
Disclosure: No positions.