Groupon Bear Case: Declining EMEA Gross Billings Could Lower Valuation By Over 10%

-70.78%
Downside
14.36
Market
4.20
Trefis
GRPN: Groupon logo
GRPN
Groupon

Groupon (NASDAQ:GRPN) reported mixed first quarter earnings in April, with revenue beating market expectations but its net loss tripling over the prior year quarter. The company’s gross billings, revenues and profits declined in international markets owing to its strategy to focus on the North American market and move away from certain low-margin goods businesses. The company’s gross billings per active user declined by 15% in the Europe, Middle East and Africa (EMEA) market.

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grpn-28In our current valuation, we forecast this metric to improve at a CAGR of 0.5% over the next 5 years. If the gross billings per active user in EMEA decline by 4% over the next 5 years, our valuation for Groupon could decline by 12%. grpn-29If we forecast EMEA Gross Billings Per User to decline at a CAGR of 4% over the next five years keeping other metrics constant, Groupon’s EMEA estimated revenue in 2020 declines by over 4%. This translates into reduced free cash flow for the business, which lowers the EV/EBITDA ratio from 9.7x to 8.0x (see tables below for calculations). The lower EV/EBITDA ratio translates into a 12% decline in Groupon’s equity valuation, when calculated with Groupon’s Trefis estimated EBITDA values for 2016. The details are shown below:
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