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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 $735 million and nearly 1.1 billion in 2012 .
Groupon has to cut on its expenses and focus on customer retention rather than acquisition for its business to be sustainable in the long term.
Trefis Forecast Rationale for Groupon's North American Subscribers
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${forecast} includes subscribers on the mailing list of Groupon in North America. These are the subscribers that receive daily deals as an email in their inbox. For our calculations, we take the quarterly average of subscribers over a given year.
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Groupon has seen monumental growth in its subscriber count since its inception, with North American subscribers growing from around 650,000 in 2009 to an average of around 37 million in 2011 and about 75 million by 2012. The growth is mainly attributable to aggressive growth in North America's urban regions which Groupon has achieved through heavy expenditures on acquisitions and online marketing.
We expect the North American subscribers to grow going forward
but not at the same rate that Groupon has achieved so far.
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Trefis considered the following factors for its forecast:
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- Growth in total cities
- As of Q3, 2012 Groupon operates in over 195 North American markets as of November 2012. This is up from 5 North American markets in June 2009. We expect that acquisitions should make further inroads into untapped U.S. markets.
- Strong customer savings
- Groupon can offer customers with deals on various products that range from 50% to 90%. Not only does it help provide discounts to individuals, it also enables people to discover their cities and get more exposure to small businesses that operate there. Groupon also offers additional benefits to customers such as $10 for every friend referred.
- Ease of use and convenience factor
- Social buying sites such as Groupon are free and easy to use. The sign up process is quite user friendly and does not require credit card data to be entered during the sign up process.
- Groupon maintains a strict privacy policy and does not share emails with anyone. This make the site more attractive for wary consumers. More information on the firm’s privacy policy can be obtained at
http://www.groupon.com/privacy
- Acquisition of foreign competitors
- Groupon has been aggressively focusing on expanding operations abroad and has acquired a number of competitors in a bid to do so.
- The firm entered in Hong Kong, Singapore, Philippines and Taiwan via uBuyiBuy, Beeconomis and Atlaspost in December 2010.
- It also entered started operations in Australia via StarDeals. Australia is proving to be a large market for social buying websites. Other players such as Spreets have already claimed to have achieved revenues over $50 million in 2010. Groupon is expected to significantly grow its subscriber base in Australia.
- In January, 2011 Groupon acquired a local India operator by the name of “SoSasta”. As the internet subscriber base in developing countries grows, the potential for growth in the social deals space could be immense.
- In January 2012, it acquired Mertado, a social shopping service based on the Facebook platform.
- Social buying finding new ways to attract customers through social gaming
- Many social networks have been exploring other mechanisms apart from traditional email and online advertising to get their word out. By tapping into social games, individuals can earn virtual currency by buying Groupon and LivingSocial while they are playing. One such service called TrialPay has partnered with Facebook to serve offers in exchange for virtual currency credits which has worked well with several of the group buying companies including Groupon. Gamers are coming back to games frequently to explore the daily deals that are out there.
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- More competitors can reduce user stickiness
- The main threat to Groupon comes from the simple fact that its business model is extremely easy to replicate. This has spawned a large number of deal based clone sites which provide a very similar discount offering to their subscribers. LivingSocial is the primary example of a large Groupon competitor which works on the same daily deal principle.
- Unlike social networking sites like Facebook, there are no real "network" advantages to Groupon i.e. it does not make a difference to an individual user if there are 50 million or a 100 million Groupon users, since at the end of the day, a Groupon user is just looking at getting a cheaper deal on a product/service in the city he/she lives. Facebook on the other hand has a big advantage, as more people means more connectivity for a user and a bigger forum for a user's interests/hobbies/activities which he can indulge in. As a result it really does not take much for a Groupon user to jump to another daily-deal site like LivingSocial as long as he/she is getting a better deal out of them.
- Other discount options are creeping up
- Google has announced plans of launching its own social buying service called Google Offers. The firm already has a major advertising network through AdWords and AdSense but has yet to exploit this in the small business space. Google has several features such as Google Maps that would help this new service do well.
- Offermatic, a recently launched service which provides customers deals based on their history of purchases on debit and credit cards is gaining some popularity amongst customers.
- VillageVines is another discounted mechanism that exclusively focuses on restaurants where a user pays $10 upfront during the reservation process and gets a 30% discount applied discreetly to his/her bill. This ensures that vacant spaces at restaurants are filled at all times.
Flash sale sites such as Gilt Groupe, Ideeli and Hautelook have gained traction as well and are a great way to help merchants get rid of inventory quickly.
- Vertically focused services such as Blackboard Eats, SpaSally and Zozi have emerged that focuses on certain segments.
- Group feature makes certain deal fall through
- One of the main reason why Groupon and other social buying sites are able to convince small businesses that their methodology works is because they are able to guarantee a certain number of buyers through the group buying concept. At times certain deals do not go through because there are not enough buyers for it. In addition the deep discounted nature of some of the deals makes it difficult in most cases to combine them with other promotional offers that the merchant is running.
- Limited number of cities
- Despite Groupon’s explosive growth in the past several months, it still has a number of cities that it needs to enter into to tap the potential market for social buying. According to the U.S. Census Bureau there are over 19,000 cities in the U.S.
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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