Groupon: Keeping The Faith Alive

| About: Groupon, Inc. (GRPN)

Summary

GRPN will report Q2 after market on Wednesday with the market focusing on local market take-rates and gross margin of new customers.

Near-term restructuring on underperforming business and markets will be key to profitability.

Remain bullish on North America’s O2O outlook and GRPN’s clear competitive advantage over the larger players.

Groupon (NASDAQ:GRPN) will report its Q2 earnings after market on Wednesday. The market will be focusing on declining local take rates and gross margin profile on new customers in light of rising competitive risk. I am fairly bullish on GRPN and see two positive catalysts for the stock. First, ongoing stability and growing O2O trends will continue to support the company's near-term growth outlook.

Second, industry consolidation will continue to favor GRPN either as an acquirer or a target. With Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) showing increasing interest in the local deal space, GRPN is an attractive target due to its solid industry standing in that the larger players do not have sufficient experience and merchant relationship that GRPN has established over the years so it is more efficient to consolidate the space via M&A rather than waging a costly price war on users and deals.

Consensus expects:

2Q rev. est. $711.2m (range $681m-$739m)

2Q adj. EBITDA est. $24.7m (range $18.2m to $40.4m)

2Q est. adj loss $0.02 (range loss -$0.06 to EPS of $0.01).

On guidance:

Revenue forecast of $3.02b (range $2.88b-$3.09b) compared with company forecast $2.75b-$3.05b.

EBITDA est. $116.9m (range $106m-$136m), compared with company forecast $85m-$135m.

GRPN's focus on smaller number of markets and high frequency categories such as food delivery bodes well for the platform but the deceleration in the US unique visitors during the quarter (+36% y/y vs. +41% y/y) suggests potential impact of competition from FB and AMZN that have taken renewed interest in the local market, which continues to remain vastly under-penetrated relative to search, social media, or even online video.

Although there are certainly opportunities, it is also important to note that the local ad segment has SMEs being their predominant customer base that have below average ad budget compared with that of the national advertisers. Because of the inconsistent ad spending by the SMEs due to volatile budget and revenue profile, it is difficult for the larger ad platforms such as FB to fully capitalize on this segment given their prior experience dealing with the larger networks.

That said, I believe companies with deep local ties such as GRPN that have been in this space for an extended period will continue to operate better than the larger players.

In the near term, customer acquisition and restructuring of the international operations will be necessary for GRPN to shift back to profitability. Although the recent exit of underperforming markets is a good start, I still need to see asset sale of poor performing segments to be more comfortable on the stock. Additionally, margin improvement in the Goods segment by focusing more on profitability rather than scale, and finally, improving ROI from its latest marketing push.

Conclusion:

I am bullish on GRPN and see it to be a contender in North America's O2O space.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.