Groupon’s (NASDAQ:GRPN) stock has gained momentum in recent months as the company beat consensus estimates last quarter, with operating profit jumping 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 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 to turn around its business in these regions.
The fact that there are over 500 social buying sites globally proves that Groupon’s business model can be easily copied. Low barriers to entry have encouraged several players to join the bandwagon. China alone has over 100 sites offering a similar service. Furthermore, group buying is not the only social shopping mechanism currently available. Other alternatives include real time online shopping, reviews and recommendations, charity-based shopping and location-based shopping. Groupon can tackle this problem by utilizing its cash pile and acquiring local players in foreign markets to strengthen its competitive position. This is possible given that the company has more than $1.2 billion in net cash, which accounts for roughly 30% of its value, according to our estimates.
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Acquisitions Make Sense
The company recently announced the acquisition of travel app Blink, which primarily deals in curated same day hotel bookings in Europe. With Blink’s 2,000 hotel partners in eight European countries, the company intends to bolster its Groupon Getaways business.  Groupon is trying to diversify as its faces pressure on its core daily deals business. The Asia Pacific and Latin American markets are still weighing on its growth, and the company needs to optimize its product mix, take rate and merchant reach to improve its performance in these regions. Diversification is necessary for stability and predictability of its business in the long run.
This is the kind of strategy the company needs to adopt, besides investing in physical goods business. Several local sites are springing up internationally and striking deals with local merchants is not going to be easy. The company will be in new territories with little existing relationships to build upon. It may also face cultural differences and therefore acquiring local business could help. In addition, overseas acquisitions make sense from a price perspective given the recent strength in the U.S. Dollar.
Investment In Physical Goods Is Another Good Use Of Increasing Cash Pile
Groupon is planning to invest in building a warehouse network that will allow it to ship physical goods to its customers directly instead of relying on its merchants.  Besides improving the delivery time, this move will aid the company’s margins. However, capital expenditures could rise and this might put pressure on Groupon’s cash flow in the near term. Groupon has mentioned that it intends to sell some specific items at best possible prices, and isn’t interested in selling everything just yet.
Although Groupon’s deals business has crumbled in international markets, the silver lining is that the brand is recognized globally. The company can leverage its large user base to successfully expand its physical goods retailing business. There is plenty of opportunity to grow given the explosive growth in global e-commerce volume and increased usage of Internet-enabled mobile devices.
Our price estimate for Groupon stands at $6, implying a discount of about 45% to the market price.Notes: