Revising Our Groupon Estimates On Higher Gross Billings & North America Growth

We recently raised our price estimate for Groupon (NASDAQ:GRPN) from $5 to $6 as the company’s Q2 2013 results reflected strong growth in North America and a rebound in gross billings in the EMEA region. 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 a 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 a lower take rate (share of transactions) as the company made some investments for long-term growth. ^[1]

While the quarter did see some improvements on the mobile front, an interesting trend to note is that Groupon relied less on its ‘push’ strategy. This strategy essentially refers to marketing through direct emails. The company is shifting its strategy to ‘pull’ wherein users find the deals themselves instead of relying on Groupon’s emails. That’s a good sign and points towards repeat customers and demand for the company’s services. Direct email accounted for fewer 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]

Let’s take a brief look at our revised estimates.

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What Main Parameters Did We Increase?

We lowered Groupon’s SG&A (selling, general and administrative) expenses as a percentage of revenues by a few percentage points, reflecting greater operating leverage and improved top line performance. We expect the figure to continue to decline year-over-year in the next few quarters as the company leverages growing mobile and Internet usage to grow its business. Groupon stated that it expects the number of smartphone users to grow fivefold over the next 5 years, and this could lead to the total number of Internet users doubling. 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 products right, it can leverage the growth in mobile commerce to connect users with local businesses. There is a big opportunity here!

Additionally, we have lowered the company’s marketing expenses forecast significantly. These expenses almost halved in the first half of 2013 compared to the same period a year ago. This decline can be primarily attributed to lower online marketing spend as Groupon is shifting its focus from customer acquisition marketing to activation.

While the things are improving, the company still has a long way to go before it can truly convince investors that its business is sustainable. The 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.

Understand How a Company’s Products Impact its Stock Price at Trefis

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