Groupon Is A Buy Going Into Earnings

| About: Groupon, Inc. (GRPN)


Groupon is set to release earnings in the first week of August.

The initiatives to boost its customer base will prove to be beneficial.

Recent acquisition by Groupon will drive growth in the long run.

The beaten down share price has made Groupon a great acquisition target.

Groupon looks like a good buy.

Having lost close to 45% of its market capitalization this year, Groupon (NASDAQ:GRPN) will be hoping for a turnaround when it reports its second-quarter results next week. But, should Groupon investors harbor any hopes of a turnaround? Let's find out.

The expectations

Analysts expect average earnings per share of $0.01, as compared to $0.02 per share in the same quarter last year. The average revenue estimate for the quarter is at $761.91 million, more than the previous year quarter's $608.75 million. This will be a massive jump of 25.20% year-over-year. So, it is clear that Groupon will be delivering solid revenue growth, but the bottom line performance is expected to be weak. However, since the company is making solid investments in the business, it can get better.

Growth-oriented investments

Groupon recently acquired Ticket Monster, a leading Korean e-commerce company, for $260 million in cash and stock. This acquisition will help Groupon expand overseas and strengthen its revenue growth. Ticket Monster comes with a user base of 4 million active customers and annual gross billings of $800 million. Moreover, Groupon will acquire a good grip over the fast growing e-commerce market of Korea.

Groupon is planning on increasing its mobile presence by providing customers with a mobile based e-commerce platform. This measure is important as mobile service offerings are crucial growth drivers for the company. This is also a better option for making daily deal transactions, rather than the usual email-based mode. The mobile business is already doing good with more than 10 million application downloads in the first quarter, delivering 54% revenue growth in this segment.

Groupon also announced the acquisition of Ideeli, a leading online flash fashion retailer, for $43 million in cash. Groupon plans to keep Ideeli running as a separate website. Ideeli has helped Groupon register its presence in the fashion market, allowing it to gain relationships with some key apparel brands. This acquisition supports Groupon's efforts to sell discounted merchandise, as Ideeli provides its customers with discounted women's and men's apparel and home decor. Groupon will also gain from Ideeli's mobile presence in the market, as well as its experience in flash-sale shopping.

Growing the base

Groupon is increasing its advertiser base and gaining traction among shoppers with new services that offer discounts for those who shop in bulk. Groupon Basics is a bulk-shopping service that enables customers to stock up and save money on over 100 household, hygiene, and health products from companies like Gillette, Dove, Airborne, Pantene, and Burt's Bees. Ordering via this service will earn consumers a 5% incentive in Groupon Bucks to be used for future purchases. Also, if the purchase is above $24.99, the service offers free shipping and delivery.

Groupon, in order to improve its performance, is adopting various strategies. It is focusing on its growth in North America and other foreign countries like Korea, trying to improve the gross margin and operational efficiency of its goods business.

The company is offering discounts to attract consumers and to expand its sales. It has also increased its drop shipping threshold from $19.99 to $24.99. Groupon also offers in-store coupons from national retailers like Macy's (NYSE:M) and Staples (NASDAQ:SPLS). To improve advertising, the company is running TV commercials in its top six markets, trying to spread more and more awareness for its services among its consumers.

With all the new initiatives and plans to build a local marketplace, the company is also looking forward to growth opportunities in its core e-mail business. At present, Groupon sends over 250 million e-mails every day to its subscribers. The company is working on an e-mail platform that will enable it to market categories of deals rather than just one per email, which lessens the number of irrelevant e-mails sent.

Acquisition target

The drop in Groupon's share price has also made it an ideal acquisition target. As I stated in my previous article:

"Following the acquisition of OpenTable (NASDAQ:OPEN) by Priceline (NASDAQ:PCLN), investors have started to hope that an acquisition is in cards for the likes of Yelp and Groupon. While I don't think any company will acquire Yelp, because of its overly-inflated valuation, I do believe Groupon is a realistic acquisition target for the likes of Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Groupon's shares have performed horribly in the past few months. The company has lost half its value and this might just be the ideal time for Google to acquire Groupon on a cut-price valuation. With a P/S ratio of just over 1.6, Groupon is fairly cheap, and it will not have much problem integrating it into its Google Offers business, which is Groupon's direct competitor. This deal would be a win-win situation for both the companies as it will give rise to cost synergies, which the companies would otherwise spend on outdoing each other."

Strong fundamentals

Groupon stands strong on its balance sheet with $1.04 billion in cash and no debt. Additionally, Groupon's cash flow generation also looks impressive, as it generated $189 million in operating cash flow and $250 million in levered cash flow last year. Moreover, as mentioned above, Groupon looks like an acquisition target, which is why investors should definitely consider using the stock's drop to their advantage.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.