Groupon’s International Business Continues To Play Spoilsport

by Trefis Team
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Groupon‘s (NASDAQ:GRPN) stock took a beating after the announcement of its Q3 results. The stock lost nearly 30 percent in a single day and is currently trading at slightly lower than $3. The stock has taken a beating because of its struggling European business and lower margins. Groupon’s margins are much lower this time around and its cost of revenue has nearly tripled y-o-y due to its new business line Groupon Goods and due to the fact that it is selling more expensive deals. The total cost of revenue went up from $68 million to to $181 million y-o-y while revenue grew at a much slower pace from $430 million to $568 million.

The company missed its lowered revenue guidance on slow growth mainly in the ‘International Deals’ business. It had released an outlook for Q3 2012 and expected revenue to be between $580 – $620 million, an increase of 35-44 percent y-o-y. It missed this guidance and reported consolidated revenues of $568.6 million, up 32 percent y-o-y. Operating income came in at $25.4 million, compared to an operating loss of $0.2 million during the same quarter last year.

However, there were some bright spots in this quarter filing. The company has a much larger subscriber base and has surpassed the 200 million subscriber mark while featuring more than 100K unique merchants. The company is experiencing significant mobile traffic and reported that a third of its North American business was completed via mobile devices. [1]

Check out our complete analysis of Groupon

Stock Takes A Beating On Downgrades And Sell offs

The stock was in free fall as it got downgraded by Barrington Research and Morgan Stanley. Analysts at Jefferies, Susquehanna, Benchmark, RBC, and Evercore Partners issued downward price-target adjustments and the bears have led the sell off leading to a near 30 percent decline. 

Highlights and Outlook

The biggest challenge for Groupon is its international business which grew by only 3 percent y-o-y to $276 million. North American revenues grew by 81 percent y-o-y and reached $291 million while marketing expenses dropped by nearly 60 percent y-o-y to $70 million.

While its customer acquisition costs have dropped significantly, the SG&A costs have gone up by 50 percent y-o-y to $290 million, and we will keep an eye on this metric in the coming quarters. The dropping marketing expenses suggests that the brand is becoming stronger with its customers, but these gains are being eroded by the climbing SG&A expenses.

Groupon also released an outlook for Q4 2012 and expects revenue to be between $625 – $675 million, an increase of 27-37 percent y-o-y. Income from operations for Q4 2012 is expected to be between $0 to $20 million, compared with a loss of $15.0 million in Q4 2011. As it streamlines its international business along the lines of its North American business, we can expect revenues to grow.

Changes To Our Valuation

We have revised our price estimate for Groupon from a near $8 valuation to a near $7 valuation because of its higher than expected run rate of SG&A expenses and a lower than expected revenue growth rate. We previously revised our analysis based on the outlook provided for Q3, which is explained here.

We currently have a $7 Trefis price estimate for Groupon, which stands nearly 90% above its current market price.

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Notes:
  1. Groupon SEC Filings, www.sec.gov, Nov 8, 2012 []
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