Will Groupon’s Stock Go Further Up In Near Term?

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Groupon

Groupon’s (NASDAQ:GRPN) shares have inched up in recent months following a steep decline prior to June 2014. The company has made some strides in terms of product development and expansion on mobile, but there are still many issues that need ironing out. While investors may have shown some faith in the stock in recent months, the run up may not continue unless Groupon can showcase meaningful improvement in its business model and user experience. Let’s take a look what has influenced the market sentiment lately and what the future holds.

Our price estimate for Groupon stands at $6.28 implying a slight discount of about 5% to the market price.

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Why The Stock May Have Inched Up In Recent Months?

Groupon is making conscious efforts to improve its offerings. A month ago, it launched time-based deals, thus adding another option to its ever growing deals marketplace. Customers can now buy these time-specific deals for restaurants and other similar establishments, and don’t have to present a voucher as they go there. While open-ended deals are popular, time bound deals will result in fewer expirations and more opportunities for strengthening the relationship between customer and restaurant owner. Over time, Groupon intends to expand this feature to other deal categories. The company recently opened up its deal builder feature to restaurants, which is the biggest category on its marketplace. Groupon has been testing deal builder with other product and service categories and the observed success has encouraged this move.

Additionally, Groupon is making significant strides on its mobile platform. The growth trajectory of cumulative app downloads hasn’t slowed down, with the figure reaching 92 million at the end of Q2 2014. [1] This is important considering that mobile commerce volume has witnessed strong growth in recent years, and Groupon’s business model is such that it makes it convenient for customers to purchase groupons and redeem them using their mobile devices as they visit the merchant. Also, the number of active customers in North America has grown by more than 19% in the first half of 2014. [1] However, this growth has been accompanied by a slight decline in the average spend per customer.

Why The Run Up May Not Continue?

There isn’t enough evidence that marketplaces model has picked up for Groupon. The user experience generated through e-mails regarding daily offers has not been pleasant. Even though the company is trying to address this issue, there are still far too many irrelevant emails being sent by Groupon to its subscribers everyday. This has hurt its brand image and has diluted the value proposition.

The company sends close to quarter of a billion emails everyday to its subscribers and this has helped it push upfront sales of groupons. A lot of these groupons tend to expire before a customer has a chance to redeem them. The average number of unused Groupons hasn’t changed much in recent quarters following a decline that we saw last year. This suggests that a lot of customers redeemed their unused and pending groupons in 2013 which may help the demand going forward. However, this also signals undesirable customer experience which will hinder the company’s organic growth.

Groupon needs to ramp up its efforts to encourage subscribers to search for deals and explore its marketplace (‘pull’ strategy) instead of relying on emails (‘push’ strategy). It needs an image makeover, and accelerating such a subscriber shift will smooth out its topline growth and help reign in expenses. In March 2014, around 9% of Groupon’s traffic in North America comprised searches on its online marketplace. The company managed to increase this figure by just 1% by the end of June 2014. This implies that email related traffic still accounts for about 90% of the company’s traffic. Given that Groupon has touted its ‘pull’ strategy for the last few quarters, its progress thus far appears to be a little disappointing. With this in mind, the run-up of Groupon shares may be unfounded and soon to reverse.

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Notes:
  1. Groupon’s Earnings Slides [] []