Groupon’s Solid Third Quarter Results Drive Stock Price Higher

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Groupon (NASDAQ:GRPN) reported better-than-expected results in the third quarter, which mitigated some of the concerns regarding its business model, leading to more than 20% rise in its stock price post the earnings release. Its key strategies, such as accelerating growth in local businesses in North America and international region, improving profitability in the goods business, and enhancing operations in the international business, saw strong progress and hence we think the worst is now behind Groupon. Many of the major headwinds related to email declines, redemptions, etc., subsided during the period, and we think the company is poised for strong growth in the coming quarters.

Though the management gave soft outlook for the fourth quarter with revenue guidance in the range of $875 million and $925 million, we think the company could outperform these expectations on the back of strong demand during the holiday season, along with company’s growing traction on the mobile platform. Mobile app downloads crossed 100 million during Q3, no doubt facilitated by recent initiatives being taken on the mobile platform.  As a result, we expect mobile to fuel growth for the company in the future.

We are in the process of revising our $6.28 price estimate for Groupon’s stock.

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Check out our complete analysis of Groupon

Robust Growth Seen Across Geographies and Categories

Groupon’s business accelerated in all geographies during the third quarter – overall gross billings rose by 39% annually, with the billings increases in Q3 in North America, EMEA (Europe, the Middle East and Africa) and Rest of World standing at 16%, 10% and 155%, respectively. This compared to billing growth of 12%, 0%, 145% in the same geographies respectively during Q2. Significantly, local billings increase in North America picked up from 1.8% in Q2 to 10% in Q3 and we expect the company to see above-10% rise in this metric in the coming quarters as well. [1]

Revenue rose by 27% during Q3 to $757.1 million, with increases of 16%, 56% and 26% in North America, EMEA and Rest of World, respectively. Active customers also showed healthy growth of 24% annually to 52.7 million in the third quarter.

All categories saw robust growth during the third quarter – gross billings within local, goods and travel businesses increased by 17%, 63% and 69% in North America, EMEA and Rest of World, respectively. However, the gross margin declined significantly to 50.2% in Q3, reflecting lower take rates, a higher mix of direct and lower margin TMON businesses, as well as order discounts to fuel the ‘pull’ marketplace. The company expects local take rates in North America to be between 35% and 38% in the future. [2] We think the gross margin could come down sequentially in Q4 due to discounting during the holiday season.

Recent Initiatives Have Begun To Pay Off

Groupon’s initiatives to bolster the mobile platform continue to gain traction in the market. Recently, it launched two new features – Pages and Gnome. Pages creates an online listing for local merchants with useful information (including contact information, maps and reviews). The company has built over seven million such pages and has currently rolled out only half a million pages. As the company launches more such pages in the future, this will drive more traffic to the site and will also help in its search engine optimization (SEO) strategy. Gnome is a new operating system for merchants that gives them greater insights regarding item-level sales and allows easier redemption by consumers. We believe this strategy targeted around merchants could lead to a significant expansion in Groupon’s merchant network in the long-run.

Additionally, the company’s recent move to launch a mobile app ‘Snap’ (which offers deals related to household products) gained acceptance, as more than 1 million people downloaded the app in the last few months. Groupon is also undertaking measures to raise its goods margins in North America by shifting additional business to drop-ship, adding more fulfillment to its own distribution center, and raising the number of units per order. This move is showing results as goods gross margins in North America strengthened to around 10% during Q3.  We expect to see further improvement in this figure over the next year. ((Groupon’s (GRPN) CEO Eric Lefkofsky on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 30))

Groupon’s efforts to reduce operating losses in the international business by standardizing best practices globally also began to show progress as the ‘rest of the world’ geography posted positive adjusted EBITDA for the first time in several quarters. The company has a long-term goal to achieve at least 20% annual growth both in gross billings and gross profit over the next five years. [2] While the target related to gross billings seems achievable, its goal on gross profit growth could take some time to achieve.

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Notes:
  1. Groupon’s (GRPN) CEO Eric Lefkofsky on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 30 []
  2. Groupon’s (GRPN) CEO Eric Lefkofsky on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 30 [] []