Groupon (NASDAQ:GRPN) will report Q4 earnings after the market close on Thursday. The near-term competitive environment in the local deals space will further pressure local billing as GRPN aims to take more market share. In this space, GRPN's product offering lacks significant differentiation so a lower take rate is necessary to attract popular merchants. Additionally, near-term competitive pressure is escalading with Facebook (NASDAQ:FB) recently moving into the local market and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) ramping up on its Google Offers. Although these two new threats have resulted in meaningful impact on the commission rate, I feel that it would be a matter of time before these two internet giants exert more pressure on GRPN's take-rate to gain a further foothold in the local ad space.
The local ad market remains vastly underpenetrated relative to search, social media, or even online video, and this is one reason why large internet companies are moving into this space given its higher expected growth prospects. However, the local ad space also presents another challenge in that the customers, which consist of mostly SMEs, do not have a consistent budget on advertising and their average spend remains well below that of the national advertisers. For example, my contact who works at a national global ad company told me that average monthly spend for an ad package could be as low as $20/month to as high as $800/month. The unstable nature of the SME business also adds to that inconsistency. That said, I believe companies with deep local ties such as GRPN that has been in this space for an extended period, will continue to operate better than the larger players.
The near-term spending on customer acquisition and restructuring of the international operations will be necessary for GRPN to get on the path to recovery. Last quarter clearly showed that customer growth on a q/q basis has stalled so investors can expect additional marketing spend to weigh in on profit. The new CEO Williams is expected to invest $150m - $200m in incremental marketing on customer acquisition and much of the market remains in a wait-and-see mode.
Consensus expects flat EPS and $845m in revenue. Consensus expectations have been drastically reset over the past few quarters and at 18x FY17 EPS the stock looks reasonably attractive and there is minimal downside from this point on.
As GRPN continues to invest in its platform and improve demand generation vs. supply push, several factors will make me more constructive on the shares. First, backing out of the unprofitable international market and/or asset sale of poor performing segments, second, 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.
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