A Few Reasons Why Groupon Should Get Better In The Long Run

Sep. 4.14 | About: Groupon, Inc. (GRPN)

Summary

Groupon has taken a beating in 2014, but the company's strong growth and impressive fundamentals cannot be ignored.

Groupon is seeing rapid growth in mobile and it is making its platform better for both merchants and users by introducing products like Pages and Gnome.

Groupon is undertaking moves to improve margins, while a drop in the number of unused coupons indicates that its business is gaining traction.

A look at Groupon's (NASDAQ:GRPN) stock price chart in 2014 shows that the company is having a really bad time. In fact, Groupon has lost a massive 40% of its market capitalization so far this year. But, at the same time, it cannot be ignored that the company has sound fundamentals and is reporting terrific revenue growth.

Strong results and fundamentals should not be ignored

In the recently reported second quarter, Groupon delivered an impressive year over year jump of 23% in revenue. But, because the company's loss widened from the year-ago period, its shares fell and investors started selling in panic. But, Groupon's increased expenses were related to the acquisitions of Ticket Monster and Ideeli, coupled with a jump in overall marketing expense.

The company has been employing sound strategies to grow its business, and this is seen in its rapid revenue growth. At the same time, Groupon has a good balance sheet. It has cash of $868 million and no debt. In addition, it recently opened up a revolving line of credit worth $250 million, giving itself more flexibility to invest in growth. Moreover, Groupon is cash flow positive, generating operating cash flow of $123 million in the past year, along with $183 million in levered free cash flow.

Moreover, its bottom line growth is expected to outperform the industry average over the next five years. Analysts expect Groupon to deliver annual growth of 27% in the bottom line, while the industry's growth is pegged at 21%. Considering these points, it looks likely that Groupon will get better in the long run, which is why its drop this year looks like a buying opportunity.

The business is getting better

The company is seeing good traction in mobile. For example, Groupon witnessed a record high in mobile transactions last quarter, as about 92 million people have already downloaded its app. There's solid demand for its services in North America as well, with 12% increase in billings to $799 million last quarter, led by a 26% year-over-year growth in its goods business and 44% growth in travel.

To achieve growth in the long run, Groupon will be focusing on certain key areas. First, it's focused on re-accelerating its local growth in North America and abroad. Second, it is looking to improve the gross margin and operating efficiency of its goods business. Finally, Groupon is striving to achieve stability in its international operations and minimize its losses globally to ensure that it generates positive segment operating income by the year-end for every region it operates in, excluding the impact from acquisitions.

Initiatives to drive growth

The company is moving in the right direction with these initiatives. It is already seeing positive sentiment in the market, as there was a decline of over 25% in the average number of unused Groupons per customer last year. This drop is a sound indicator of customers' willingness to buy more. Additionally, Groupon has widened the site-wide sales and order discounts for the last few quarters in order to drive the adoption of its marketplace.

Going forward, Groupon intends to pass on a portion of these promotional discounts to its merchants, and these efforts are expected to improve the take rates in the local segment, and maintain them within the healthy range as seen in the last couple of years.

The second priority of Groupon is to ramp up its goods margins, predominantly in North America. Groupon has made some crucial changes to its operations to reduce its rising historical costs as compared to other ecommerce companies. These moves includes shifting more of its business toward drop shipping, and shifting a large part of fulfilment operations to its own distribution center in Kentucky, apart from accelerating units per order.

Impressive innovation

Additionally, Groupon targets on increasing its share of merchants currently working with the company from 5% to 100% by launching two new products, Pages and Gnome. The company has already built pages for a large number of merchants in North America, and will start introducing them in the coming quarters.

Groupon is also keen on reducing its dependence on emailed daily-deal offers by diversifying into the sale of physical goods and discounts accessed through mobile phones. Groupon has introduced a tablet-computer-based cash-register system called Gnome during the second quarter to compete with Square, PayPal, and others. Hence, the company is working on making the experience for its customers easier.

Now, when Gnome is combined with approximately 92 million people who have already downloaded its apps, it will be able to set up the foundation of a local commerce network where users and merchants are always connected. This will enable consumers to discover the world around them and cut costs, and also empower merchants to offer real-time discounts and incentives to entice the right customers.

Conclusion

Considering Groupon's strategies, investors should not be discouraged by the company's wider-than-expected loss last quarter. The company is investing in its business to improve its performance in the long run, and as we saw above, it should become profitable in the due course of time. Thus, it is advisable for investors to consider buying Groupon's shares by utilizing the stock's massive drop this year.

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.