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Investment Overview for Groupon (NASDAQ:GRPN)
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Below are key drivers of Groupon's value that present opportunities for upside or downside to the current Trefis price estimate for Groupon:
International Featured Deals
- International Featured Deals Take Rate: Due to aggressive international expansion, international featured deals is the most valuable division for Groupon. We estimate a decline in take rates for the international division from around 40% in 2012 to around 30% by the end of the Trefis forecast period. The decrease is attributable to increasing competition from daily deal clones. Additionally, merchants with high marginal costs would increasingly find high take rates unfeasible as their gross margins are already low. However, if Groupon manages to target merchants who have low marginal costs and consequently maintains its take rates at 40% levels, there could be a 10% upside to our current price estimate. On the contrary, take rates could decrease further than expected if local daily deal players gain a further foothold in Groupon's international markets. If take rates fall to 22% by the end of the forecast period, there could be a downside of 10% to the Trefis price estimate.
- Groupons sold per subscriber internationally: This metric indicates the level of user engagement with Groupon in international markets. While Groupons sold per subscriber stood at an estimated 0.9 for 2011 which has declined to about 0.65 in 2012 and we expect it to decline to around 0.3 in the next few years. We believe that incremental Groupon subscribers are likely to be less active which will lower average Groupons sold per subscriber. Additionally, an overall daily deal fatigue may kick in with time as users develop a greater reluctance to act on the numerous daily deal e-mails they receive. However, if Groupon overcomes these hindrances and its Groupons sold per subscriber were to remain in 0.5-0.6 range, there could be an upside of 10% to our current price estimate. Likewise, if this metric were to fall further than we estimate to around 0.25 Groupons sold per subscriber by the end of our forecast period, there could be a 10% downside to this price estimate.
Marketing, SG&A Expenses
- SG&A Expenses:
SG&A expense for Groupon has been around 45% of net revenue on average. We expect this to grow slightly by the end of our forecast period. However, there could be a significant upside to the stock price, if it fell at a faster than expected rate. There could be a 40% upside to the current Trefis price estimate, if the SG&A expenses fell to 30% by the end of the forecast period. If it remained constant at 53% of revenues, we can expect a 15% downside.
- Marketing Expenses:
Marketing expense for Groupon has been around 50% of revenue on average. We expect this to fall significantly, to 20%, by the end of our forecast period, as the brand builds up, more users sign up and the network effect takes over, reducing the need to heavily promote its deals. However, there could be a significant downside to the stock price, if it fell at a slower than expected rate. There could be a 50% downside to the current Trefis price estimate, if the marketing expenses fell to only 10% by the end of the forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Groupon at the top of the page.
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Groupon is the largest collective buying platform. It was launched in November 2008 as a part of The Point (an online community launched in 2007). Groupon features daily deals for various restaurants, spas and other stores in over 175 North American markets and 45 countries worldwide.
Groupon serves as an alternate advertising medium for business owners. For each Groupon sold, Groupon gives a share (typically 40-50%) of the coupon value to the business owner with the rest of the amount taken as its revenue.
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Rapid growth since inception
Groupon has sold over 22 million daily deal coupons in North America alone in its first two year period. The restated revenues for the first half of 2012 itself are over $1.1 billion. Daily deals are featured in over 175 North American markets in over 45 countries worldwide. The Daily Featured Deals have operating margins of around 40% and are the main source of revenue for Groupon.
Local businesses expected to spend over $35 billion by 2014
According to BIA/Kelsey, a local media advisory firm, local businesses spent about $20 billion online in 2010 and this figure is expected to reach more than $35 billion by 2014.
Groupon Now can be a market differentiator
Groupon Now is a real-time location-based deal locator launched by Groupon in early 2011. This is a unique initiative which enables users to instantly find deals in their vicinity through Groupon's mobile app. Considering that the traditional daily deal business is already flooded with clones and competitors, Groupon Now might prove to be the differentiating factor for the company in coming years.
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Social buying to continue to increase
Research has indicated that the main factors that motivate individuals to act on an opportunity include social aspect, scarcity and liking. All these factors present an interesting opportunity for the sector as a whole. Although the concept of social buying has existed for a while, it has only recently gained some traction. This has been attributed to several factors.
- Due to the presence of social platforms such as Facebook and Twitter, the social nature of discounts has held well amongst users. Users can interact with one another easily and discover opportunities in a quicker fashion.
- Traditional coupons and sales do not offer as deep a discount that most of the social buying sites offer. The collective nature of deals enables customers to obtain deep discounts only if a certain number of individuals subscribe to it.
Growth in competitors
Groupon’s business model is easily copyable proven by the fact that there are over 500 social buying sites across the world. Low barriers to entry have encouraged several players to join the band wagon. China alone has over 100 sites offering similar services. Groupon has tackled this situation by trying to acquire other competitors in smaller markets in a bid to expand.
Strong international opportunity
According to recently collected data from comScore, the Asia Pacific region accounts for 2.3% of Groupon's web visits in October, 2010. The Middle East was only 0.2%. This clearly indicates the strong potential for growth internationally.
Availability of shopping alternatives
Group buying is not the only social shopping mechanism currently. There have been many other means for customers to get discounts and learn more about what’s around them. They include
- Real time online shopping – Users can connect with each other and exchange ideas at the same time to get opinions about products
- Reviews and recommendations – Sites offering a discount for reviewing a product or recommending it to others
- Charity based shopping – Websites like iGive provide discounts to users for shopping through their network of affiliates
- Location based shopping – Users are given points when they enter and check in places. Four Square is an prime example
Groupon is having legal troubles
Many critics allege that Groupon is ultimately selling gift certificates (in the name of Groupons). In most of the United States, gift certificates, which are essentially shopping vouchers are not supposed to expire. In the extreme case also, the minimum expiration date stands at over 5 years. Many consumers have complained that some of their Groupons expire before they have a chance to use them. Groupon is already facing legal scrutiny in many U.S. states for a supposed gift card violation and any strict action on part of regulators can significantly threaten Groupon's revenue as it directly affects its core business.
Groupon Goods Will Lead To Lower Gross Margins
Groupon is now in the business of retail e-commerce and has diversified into Groupon Goods. The company is not going to become a complete e-tailer like Amazon.com, but will feature limited time deals on goods such as electronics, toys, clothing, games and other product categories.
This change in the business model will lead to more stable revenues as compared to the daily deals business, but gross margins are likely to be lower. If this business becomes a significant revenue driver, we can expect its margins to go lower. According to its most recent earnings, goods has been the primary driver of growth in Q1 and Q2, 2012 and as of Q3, 2012 it is at an annual billings run rate of nearly $1.5 billion.
Groupon's cash balance is threatened by skyrocketing expenses
According to its latest filing, Groupon's net cash balance stood at around $1.2 billion. This cash level is considered to be quite low when compared to the level of marketing and SG&A expenses that the company incurs. These expenses stood at $735 million and nearly 1.1 billion in 2012 .
Groupon has to cut on its expenses and focus on customer retention rather than acquisition for its business to be sustainable in the long term.
Trefis Forecast Rationale for Groupons Sold per Subscriber Internationally
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${forecast} is the average number of featured deals bought by a Groupon subscriber in international markets for a given year. Some Groupon subscribers may purchase several deals in a given year and others may purchase a fewer number of deals. For our analysis, we have taken an average number of featured deals bought by a subscriber in a given year.
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Groupons were started being sold internationally only in 2010, with the average number of Groupons per subscriber standing at 0.88 for 2010 and 0.91 in 2011. We estimate it to be around 0.65 for 2012. This figure is markedly less than the average Groupons sold per subscriber in North America, where daily deal usage is much more active.
Going forward we expect the ${forecast} to decline.
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Trefis considered the following factors for its forecast:
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- Negative consequences for local businesses
- While Groupon claims that 97% of businesses that are featured ask to be featured again, many businesses often find Groupon to be a loss making proposition for them. Not only do they not break even in terms of costs but also the lack of repeat customers and additional sales make it difficult for businesses to operate.
- According to a recent study at Rice University, Groupon promotions were not profitable for 32% of the businesses with 40% of the respondents indicating they would not run a similar promotion.
- As long as Groupon keeps its gross margins (i.e. the commission it earns over every Groupon) as high as they are currently, there will be a sizable number of merchants who will continue to face be unprofitable, especially those in the products based businesses. This effectively means stiff merchant relationships and a declining rate for Groupons sold for every subscriber.
- Groupon's business model is deteriorating in its mature markets
- A closer study of Groupon's case studies (available in its S-1 filing) reveals that the company's business model is not working as planned, especially in its mature markets.
- In Boston, one of Groupon's oldest markets, revenue per subscriber has been declining each quarter from $41 in June 2009 to about $13 in June 2011. This is estimated to be at around $11 in 2012
- This quite clearly suggests that while Groupon is showing an ever increasing subscriber base and top line growth, it has not managed to successfully retain those subscribers to buy more Groupons in future. This is a worrying sign for Groupon, as once the company's acquisition spree ends a declining revenue per subscriber trends would start showing in its other markets as well.
- Strong competition in the discounted deals space
- It is estimated that there are over 200 social buying site clones in the US itself and over 500 worldwide. Low barriers to entry and start up costs have given rise to a number of competitors in the space. Several of these sites have been backed by venture capital funds as well. BuyWithMe has been backed by Bain Capital Venture and Matrix Partners. TownHog, another daily deals site has been back by D.E.Shaw.
- Some sites offer additional incentives as well for instance the discount offered increases as more people sign up for sites such as eWinWin. Living Social offers customers a free deal if they are able to persuade three other people to buy it.
- Expanding subscriber base may not ensure similar increase in deals sold
- The Groupon business model is highly copyable, and customers are looking for cheaper deals no matter where they come from. Thus it shows that loyalty towards Groupon is as a result of the quality of deals and discounts that they can provide and not its brand as such. Due to this, we don't expect subscriber engagement levels to be particularly high for Groupon daily deals (compared to other competitors such as LivingSocial). Even if Groupon continues to build scale, it can not guarantee that growing subscribers will keep buying Groupons at the same rates.
- When Groupon acquired SoSasta (based in India), the site gained media attention and saw an increase in traffic, however the total number of deals sold have not shown great improvement. On average the number of deals sold during our analysis period have ranged between 0-5.
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- Groupons can be beneficial to certain businesses
- While the Rice Study casts some red flags over Groupon's business model, Groupons can be a better alternative to traditional advertising for certain class of businesses.
- According to the Rice study itself, 70% of service businesses such as health clubs, spas and yoga centers actually made money after running a Groupon deal. This is in contrast to restaurants where only around 44% of surveyed merchants profited financially through Groupon.
- The primary reason for this is the marginal cost incurred by the merchant for every new customer. For low marginal cost businesses like fitness classes it would not cost much to include another user in the session. Tangible products such as food would have low gross margins and hence might find a daily deal like Groupon to be a loss-making initiative.
- In the same regard, the Rice study also mentions that around 48% of the businesses indicated that they would run another daily deal promotion. We believe that a majority of these businesses would fall under the low marginal cost category and Groupon may focus specifically on these businesses for running its deals in the long term.
- Larger variety of promotions to encourage buying
- The greater the number of deals offered to customers, the higher the likelihood of subscribers opting to purchase Groupons. Businesses have realized the importance of social buying as an alternate means to the traditional advertising mechanisms used and are trying to increase their presence on such sites.
- During certain periods of the year many businesses do not have marketing budgets and thus can use social buying mechanisms such as Groupon to increase their presence in local communities.
- Businesses spend heavily on advertising without ever realizing what the return will be. Groupon guarantees a return as businesses only get paid if enough customers sign onto it.
- Growth in traffic
- According to site analytics compiled from compete.com , Groupon's unique visitors have increased from around 900,000 in September 2009 to over 5 million in June 2011. This figure is currently at around the 10 million mark as of November 2012
- Deals catered to personal interests
- A large reason as to why over 75% of Groupon subscribers are female is because of the large prevalence of deals that were catered to females. In July 2010 , Groupon launched a new feature called “Deal Personalizations” which offers deals to customers based on their preferences, buying history and interests. This has helped drive an increase in deal purchases in the recent months.
- Strong backlog of deals
- Popular social buying sites such as Groupon have a huge backlog which has made it difficult to promote deals. Groupon's merchant backlog stood at 49,000 by the of the second quarter of 2011. A larger pool of deals to choose from would likely have the impact of increasing the number of Groupons bought per subscriber in the long term.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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