Although Groupon’s (NASDAQ:GRPN) third quarter revenue came in at the lower end of its guidance, the company did well in terms of improving profits. The revenue growth suffered to an extent due to seasonality and the altered revenue recognition timing resulting from the gradual shift in strategy from ‘push’ (deal sales through email) to ‘pull’ (searching deals on website). However, this is a good move for Groupon in the long run and could potentially lead to more purchases by users. Gross billings jumped by 20% in North America and 12% 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.
Our price estimate for Groupon stands at $6.25, implying a discount of about 40% to the market price.
Mobile Is Becoming More Engaging For Groupon
Groupon is heavily banking on the growth in mobile and Internet usage. The company 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.  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.
Groupon saw over 9 million downloads for its mobile apps globally in Q3, with total cumulative downloads so far amounting to 60 million.  This is still a fraction of the company’s total subscriber base and there is significant opportunity to grow. The trend is encouraging as the mobile platform’s share of North American transactions stood north of 50% for September 2013, with the worldwide figure reaching close to 40%.  Although it is taking Groupon longer to activate their mobile users, the subsequent engagement is higher on this platform.
Groupon Is Doing The Right Thing By Making Acquisitions
We believe that Groupon is doing the right thing by making acquisitions. A couple of months ago, the company 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.  During Q3 2013 earnings release, Groupon made another announcement stating that will acquire Ticket Monster, which is one of the leading e-commerce sites in Korea. The sales through email account for less than 10% of the company’s overall revenues indicating heavy reliance on ‘pull’ strategy. This fits well in Groupon’s long term vision.
Groupon is trying to diversify as its faces pressure on its core daily deals business. This 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 the 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.
What Are the Risks?
Groupon’s business model can be easily copied and a low barrier to entry has led to increased competition in the daily deals space. The company 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.
There is another issue inherent in the current business model. A large number of Groupon’s merchants are not profiting from 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 for whom a Groupon promotion is unprofitable.Notes: