Here’s Why We Are Bullish On Groupon

Groupon‘s (NASDAQ:GRPN) stock has seen major weakness over the last six months, owing to lackluster results over the past few quarters. More specifically, its results have been dampened by headwinds such as appreciation of the U.S. dollar and deceleration in the North American local business. Nonetheless, we continue to remain bullish on the company’s stock, as our price estimate of $7.57  represents more than a 50% premium to its current market price. We believe the company’s strategies to launch merchant pages, add higher-quality merchants, optimize the mobile experience and transition itself into a pull marketplace could fast-track growth over the coming years. At the same time, we expect the company’s margins to improve over our forecast horizon, as the measures being taken in the goods’ and international businesses pay off in the coming years.

Check out our complete analysis of Groupon

Growth Strategies Will Help Drive Growth

Push To Pull Transition Will Bolster Demand: While Groupon began with a push-only model, wherein it sent millions of emails everyday to users, it has been working towards expanding into non-email based marketing channels. This strategy seems to be showing results as active search for deals accounted for almost 30% of all transactions in North America in Q2 2015, as compared to 23% in the corresponding period a year ago. We believe Groupon will undertake similar efforts to expand into other marketing channels in other geographies as well, following the steps taken in North America. At the same time, the rate of decline in the email-based business also subsided recently, and this should help buttress growth in the coming future.

Introduction Of Merchant Pages Could Boost Supply And Organic Traffic: Over the past few quarters, Groupon has launched millions of ‘Merchant Pages’, that carry information pertaining to contact information, reviews, maps, and inventory for merchants across North America. The company is also complementing these pages with low-discount deals and market-rate offers to enhance its penetration among merchants. With less than 5% of the target market of merchants currently tied to Groupon, we believe these efforts (if successful) could translate into a significant expansion in the company’s merchant network. Moreover, these Pages will also help bring additional organic search traffic to the company’s websites, leading to more transactions on its platform.

The Addition Of Higher-Quality Merchants Could Enhance Popularity: In order to attract national and high-quality merchants, Groupon has significantly reduced its take rate for such merchants. While this move will have an impact on gross margins, we believe the addition of inventory from large-scale merchants will help boost Groupon’s popularity and usage among customers. As a result, this could help Groupon to gain a larger share of the customer wallet in the coming years.

Mobile Strategy Will Help Increase Growth: Given the global trend towards rising Internet usage from mobile devices, Groupon’s future growth will largely depend on its ability to penetrate on the mobile platform. We believe this trend will positively drive Groupon’s business, considering mobile users tend to buy more heavily as compared to web-only users. Groupon has seen more than 110 million cumulative app downloads to date, and continues to work towards further optimizing the user experience on its mobile apps.

Groupon’s Profitability Is Expected To Improve In The Coming Years

Goods Margins Are Forecast To Rise In The Future: Groupon’s margins are the lowest in the goods’ business, as compared to its local and travel businesses. At the same time, the increasing share of goods’ mix in the overall business has impacted the company’s profitability in the recent past. However, Groupon is taking a number of steps to raise its goods margins, such as raising the number of units per order and moving additional business to drop ship. These measures have started to yield positive results as gross profits (as a percent of gross billings) rose by 200 basis points quarter over quarter in North America to 10.4% during the most recent  results. This contributed to more than 80% rise in operating profits in the North American region. We expect these goods’ margins to move towards mid-teens in the coming quarters, thereby leading to increase in the company’s profitability.

Though the goods’ margins fell in the EMEA region during Q2 2015, we expect this to a be a short-term issue caused by a temporary shift in the mix of products. Consequently, we forecast margins in EMEA will  also rise over our forecast horizon.

Losses Could Diminish In The ‘Rest Of The World’ Region: While the rest of the world geographies have contributed negatively to Groupon’s profitability over the past few years, Groupon has taken various measures to restructure its international operations. As a result, the company divested its controlling stake in Korean and Indian operations recently. Owing to these measures, we believe Groupon’s losses in the international region could decrease over the coming years.

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