Groupon (NASDAQ:GRPN) is a global leader in local commerce, enabling the people around the world to search and discover great businesses and merchandise at a discount. The company increased its global active customers by a decent margin over the last year, with a considerable growth potential expected in the coming years. However, the stock has plunged almost 38% year-to-date, which is due to the small unexpected loss in the current quarter after the spiking higher results for its holiday season. Though, in this article, we will discuss the company's performance over the last year with underlying growth potential in the industry, along with future growth prospects and potential risks.
In order to understand the performance of Groupon, we must have a clear picture of its business model. The company operates online local commerce marketplace throughout the world that connect merchants to consumers by offering goods and services at a discount. The company acts as an intermediary between merchants and consumers, and charges a pre-defined spread from the merchants, called third-party merchandise. Further, the company also performs direct selling to the end-consumers, with comparably greater profit margins, named as direct selling merchandise. The gross billings and revenue recognition in both conditions vary - the gross billings, which represent the total dollar value of customer purchases of goods and services, differ from the company revenue in the third-party transactions; however, both are same while selling direct merchandise to the consumers.
The e-commerce businesses are now deriving a huge portion of their profits from global sales. Groupon also imitated the trend and started concentrating on the international market. The company performed much better on a number of financial and non-financial metrics over the last year. Moreover, the company grew its global gross billings by 7% to $5.8 billion during the last year, with major growth coming from the North American and EMEA regions. Groupon multiplied its customer base in the last few years, and currently has 44.9 million active customers, which grew by 9% year-over-year as of the last year, ensuring its growth in the future.
The increased customer base enabled the company to grow its revenue by 13% during the last year compared to 2012 - the North American region was again the main growth driver, with an increase of about 9%. However, over the last year, the income from operations decreased by 23% due to the lower margins, which were willingly accepted to improve the quality and increase the number of deals offered to customers and to expand the company's online marketplaces.
Groupon also recorded net losses of $95 million in the last year, which is mainly due to the expenses related to impairment of the Groupon's investment in "Life Media Limited" (known as FTuan), which offers discounted products and services from vendors in China. FTuan has operated in losses since its inception, and has used proceeds from equity offerings to grow its business.
Future Growth Prospects
The business model of Groupon continues to evolve from an email-based "push" model with a limited number of deals offered, to more extensive online "pull" marketplaces, where customers can come to Groupon and search for deals on goods and services. These marketplaces are accessible through the company websites and mobile applications. The mobile industry has grown very quickly over the last few years, especially with the introduction of smartphones. The transition to mobile apps and pull strategy is a key in building of a smoother, more efficient model for the company. The consumers are increasingly accessing the deals through the mobile application, with nearly 50% of the global transactions being completed on mobile devices in the last year, and nearly 70 million people have now downloaded the mobile application worldwide.
Recently, Groupon completed the acquisition of LivingSocial Korea, a company that owns Ticket Monster, which is the fastest growing e-commerce companies in the region, and Ideeli, a fashion flash site in the United States, for $25 million. Together, in the first quarter of the current year, these investments are expected to contribute approximately $50 million to the company revenue. This investment will accelerate the transition of company's strategy to mobile and pull model, and therefore, give a boost to revenue growth and earnings in the coming years.
The unique business model of Groupon surely has a great potential, which requires appropriate implementation and strong competitive advantage in order to survive for a longer run. However, there are also some potential risks attributed towards it. The biggest and foremost risk is that the business model of the company is easy to replicate by other companies. The company's deals with merchants have not been comparatively large - also, it does not compete with bigger market players such as Amazon (NASDAQ:AMZN). Another risk attributed towards Groupon business model was the online-only existence of the company, which suffers a customer retention problem in the long run. Nonetheless, this risk is hedged by expanding in the physical goods space by considering the success of leading online retailer, Amazon. The company is building a network of warehouses that will allow it to deliver the physical goods to its customers directly. This will also increase the company's deals with merchants with a considerable warehouse space to keep the inventory.
The long-term prospects of the company look good, and the recent dip will allow the investors to add to their positions. The company is growing its global footprint, and the further expansion in business segments will allow it to grow in the medium-long term. There are some risks regarding the business model of the company; however, being the pioneer and the leader should allow Groupon to fend off competition from the smaller players or new entrants.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.