Groupon’s Stock Jumps On Q2 Earnings But Is It Sustainable?

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GRPN: Groupon logo
GRPN
Groupon

Groupon’s (NASDAQ:GRPN) stock has been on run for the last few months. The positive market sentiment has resulted from the change in leadership, analyst upgrades and the company’s investment in key growth areas of mobile, ‘local’ and ‘pull’.

The second quarter results further fueled this momentum, and the shares jumped 25% following the earnings announcement. Groupon beat consensus estimates as its operating profit climbed due to strong growth in North America and a rebound in gross billings in the EMEA region. While this suggests that the situation might be improving, the company still has a long way to go before it can truly convince the investors that it’s business is sustainable. Asia Pacific and Latin American markets are still weighing on Groupon’s growth, and the company needs to optimize its product mix, take rate and merchant reach in order to turn around its business in these regions.

Groupon’s gross billings were up 10% in the second quarter due to 30% growth in North America and 4% growth in EMEA, partially offset by 21% decline in the other international markets. [1] However, the revenue growth was slightly lower. While the sales grew by 45% in North America, EMEA suffered due to the reduction in the ‘take rate’ (share of transaction) as the company made some investments for long term growth. [1]  Going forward, a lot will depend upon how Groupon leverages the growth in mobile commerce and combines it with ‘local deals’ to empower consumers to find attractive and relevant offers on the go.

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While the quarter did see some improvement on the mobile front, an interesting trend to note was Groupon’s reducing reliance on ‘push’ strategy. This strategy essentially refers to marketing of deals through direct emails. The company is shifting its strategy to ‘pull’ which refers to users finding deals by searching themselves instead of relying on Groupon’s emails. That’s a good sign, and points towards repeat customers and the demand for the company’s services. Direct email accounted for less than 40% of North American transactions in the second quarter. [2] In addition to this, over three-fourths of merchant contracts that Groupon signed in June 2o13 in North America, opted to feature in the company’s ‘Pull’ marketplace with monthly recurring deals. [2]

Check out our complete analysis of Groupon

Mobile & ‘Local’ Are Likely To Be Key Growth Strategies

Groupon is heavily banking on the growth in mobile and Internet usage. The company stated that it expects the number of smartphone users to grow fivefold over the next 5 years, and this could lead to the doubling of the global Internet user base. [1] This trend plays right into the hands of Groupon and other e-commerce companies such as Amazon (NASDAQ:AMZN). If the company can get its take rate, merchant base and the products right, it can leverage the growth in mobile commerce to connect users with local businesses. There is a big opportunity here!

Groupon saw over 7.5 million downloads for its mobile apps globally in Q2, with total cumulative downloads so far amounting to 50 million. [2] This is still a fraction of the company’s total subscriber base and there is significant opportunity to grow. The trend is encouraging as mobile platform’s share of North American transactions stood at 50% for June 2013 compared to 30% during the same period a year ago. [2]

Source: Groupon’s Q2 2013 Earnings Deck

However, this strategy can not be successful unless the merchants remain profitable despite selling their products at deep discounts. This is especially difficult for local businesses which often find Groupon to be a loss making proposition for them. We believe that as long as Groupon keeps its gross margins (the commission it earns over every Groupon) around current levels, there will be a sizable number of merchants who will continue to remain unprofitable.

Growing Competition & Availability Of Shopping Alternatives Can Pose Threat

The fact that there are over 500 social buying sites across the world proves that Groupon’s business model can be easily copied. Low barriers to entry have encouraged several players to join the bandwagon. Groupon has tackled this situation by trying to acquire other competitors in smaller markets in a bid to expand. Furthermore, group buying is not the only social shopping mechanism currently. Other alternatives include real time online shopping, reviews and recommendations, charity-based shopping and location-based shopping. It may be hard for Groupon to grow amid this rising competition.

  • Real time online shopping – Users can connect with each other and exchange ideas at the same time to get opinions about the products.
  • Reviews and recommendations – Sites offering discounts for reviewing products or recommending them to others.
  • Charity-based shopping – Websites such as 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 a prime example.

We are in the process of updating our pricing model for Groupon in the light of recent earnings, and will have an update ready soon.

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Notes:
  1. Groupon’s Q2 2013 Earnings Transcript [] [] []
  2. Groupon’s Q2 2013 Earnings Deck [] [] [] []