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Investment Overview for Groupon (NASDAQ:GRPN)
Below are key drivers of Groupon's value that present opportunities for upside or downside to the current Trefis price estimate for Groupon:
- Groupon North America Average Active Customers: We expect this figure to increase from an estimated 22.5 million in 2014 to nearly 41 million by the end of our forecast period. However, there can be an upside of more than 10% to our price estimate if this figure was to go up to 50 million instead. On the other hand, there can be downside of similar order if the competition halts the growth in Groupon's North American customer base, and the figure reaches only 30 million.
- Groupon North America Take Rate: We expect this figure to increase from 55.2% in 2014 to over 65% by the end of our forecast period as a result of Groupon's focus on growing physical goods sales. However, there can be a downside of about 10% if the rate was to remain stable. This could happen if increase in take rate due to higher proportion of direct sales gets offset by addition of higher quality (lower take rate) merchants.
- SG&A Expenses as % of Revenue: We expect this figure to decline from 34% in 2014 to around 25% by the end of our forecast period due to operating leverage gain, cost cutting efforts and measured approach towards business expansion. However, if these costs were to decline to only 30% instead, there can be downside of about 10%.
For additional details, select a driver above or select a division from the interactive Trefis split for Groupon at the top of the page.
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 North America and international markets. The company also sells physical goods and merchandise, and has expanded its offerings to include travel and flight packages.
Groupon serves as an alternate advertising medium for business owners. For each Groupon sold, Groupon gives a share of the coupon value to the business owner with the rest of the amount taken as its revenue.
Groupon's North American business is most valuable primarily due to higher number of subscribers and high take rate. Compared to 14.7 million average active customers in EMEA and 11.7 million in Rest of World, Groupon had 22.5 million average active customers in North America in 2014. In addition to this, its take rate for the region stood at 55.2% during the same year compared to 47.0% in EMEA and 18.2% in Rest of World. The company has strong brand recognition and merchant relationships in the U.S.
Increased focus on mobile
Groupon is heavily banking on growth in mobile and Internet usage. Its cumulative app downloads crossed 110 million in the fourth quarter of 2014. Mobile platform currently accounts for more than 50% of Groupon’s business and in certain markets, this figure stands at more than 65%. This bodes well for Groupon considering Internet usage is increasingly shifting towards mobile usage, and average spend by mobile customers is higher than by web customers.
Measures are being taken to boost margins in the e-commerce and international businesses
Groupon is trying to raise its goods margins (especially in North America) by shifting additional business to drop-ship, adding more fulfillment to its own distribution center, and raising the number of units per order. These measures are showing results as goods’ gross margins (as a percentage of gross billings) within North America stayed north of 9% in Q4 2014, and witnessed year-over-year improvement of 190 basis points.
Moreover profitability in the international business, which has been an area of concern, is showing signs of improvement. Excluding Ticket Monster business, the rest of the world delivered a $12 million improvement in operating loss during Q4 2014.
New product launches could help in merchant expansion
Recently, Groupon launched two new features including Pages and G.Nome operating system. Over 800,000 pages, that carry valuable merchant-related information (such as contact information, maps and reviews) and allow users to follow merchants, request deals and make appointments were released publicly in 2014. More than seven million such pages have been built, and will be released in the coming quarters for search engines to index. Alongside, the G.Nome operating system, that provides merchants with useful item-level sales and connects them to Groupon’s platform in real-time, is being rolled out across merchants. The company’s addressable market for merchants is immense, since presently less than 5% of the target market of merchants is tied with Groupon. We believe as these features gain popularity, a larger proportion of merchants would put deals on Groupon, which will make the platform even more attractive for consumers.
Move from Push To Pull model
While Groupon started with a Push-only model, wherein it sent hundreds of millions of emails everyday to users, it has been making efforts to broaden into non-email channels over the last few years. This strategy has met with some traction, since the share of emails in North America local business has come down from 48% in Q4 2011 to 22% in Q3 2014. At the same time, the share of non-email business has risen from 52% to 78%. The ‘Pull’ strategy has met with some success, since active search for deals comprised for 24% of North American transactions at the end of Q3 2014, as compared to 9% at the end of Q3 2014. We expect the Pull marketplace to fuel the company’s business going forward, considering email strategy by itself is unsustainable in the long-run. In an encouraging sign, while the email business suffered more than 20% CAGR drop over the last the three years, its rate of decline subsided over the past year. We think this could help propel sales increase even further in the coming future.
Growth in competitors
Groupon’s business model is easily copyable and several social buying sites have sprung up across the world. Low barriers to entry have encouraged these 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.
Expansion in new product categories
Groupon has been making acquisitions and investing in diversifying its business to reduce its reliance on cash flows from daily deals. In September 2013, the company announced the acquisition of travel app Blink, which primarily deals in curated same day hotel bookings in Europe. Groupon is also investing in building a warehouse network that will allow it to ship physical goods to its customers directly instead of relying on its merchants. The company has also introduced discount coupons. The online coupon market in North America stands at $4 billion annually, and the total coupon market is somewhere around $28 billion.
Recent divestiture of Ticket Monster
In April 2015, Groupon announced the sale of 46% controlling stake in Ticket Monster (its South Korean online commerce business) to a partnership (comprising KKR and Anchor Equity Partners) in a deal valued at $360 million. The company is expected to gain between $195 million and $205 million on a pre-tax basis from the sale, and will retain 41% stake in TMON (on a fully diluted basis). While this transaction is forecast to close in Q2 2015, TMON was considered a discontinued operation in the financial results of Q1 2015. While this divestiture will negatively impact top-line growth during the year, its impact on profitability will be positive as TMON contributed significant losses in the recent past.
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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.
See more on: DCF Methodology
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