Groupon Deserves More Respect

 | Aug 30, 2013 | 10:12 AM EDT  | Comments
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open

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yelp

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What's the best performing Internet stock this year?

It's not Facebook (FB) which is up 55% for the year and 80% in the last three months.

It's Groupon (GRPN), which is up 113% on the year. That includes a big move up after its second-quarter earnings a few weeks ago.Yet, we don't hear too much about Groupon. The company seems to have a permanent stain against it.

Groupon hit all-time highs around $30 just after its initial public offering (IPO) in late 2011 and then the stock seemed to sink like a stone. It finally bottomed out at around $2.50 last November. There were concerns about accounting. There was an implosion in its European business. Its CEO, Andrew Mason, seemed a little loopy to most sober Wall Street types. However, following a move from $2.50 to $10, and a new CEO installed -- co-founder Eric Lefkofsky -- it's worth taking another look at Groupon.

Since Facebook's bonanza earnings released at the end of July, the mobile Internet stocks have been on fire. Zillow (Z) is up 29%. Opentable (OPEN) is up 15%. Yelp (YELP) is up 35%.

Groupon has had a good month too -- up 17% -- but it's not really mentioned as a mobile play. It's still thought of as an "email push daily deals company." And yet, as seen by its last earnings call, 50% of Groupon's transactions are now from mobile. The company is clearly trying to reposition itself as a pull mobile and location-based marketing company.

This transition is just starting to play out. It is early but the newer pull customers appear to be much more engaged and spending more, compared to the old Groupon push customers.

While North America is going well for Groupon as a business, the rest of the world -- especially Europe -- has yet to turn for them. That's still a big catalyst for the stock as we are going into the last quarter of the year. Any meaningful turn in that business will immediately show up in better earnings for the whole company. In the last quarter, "rest of world" contributed a $14 million loss to Groupon.

Other factors to consider:

  • Groupon still has a $300 million stock buyback program in place.
  • Like Facebook, what was perhaps most impressive about Groupon's second quarter performance was the reacceleration of its revenue growth. (Local was the biggest part of that growth, so it remains perhaps the most interesting aspect of the company's future story.)
  • Goods are still a booming business and Groupon has committed to starting to build out some distribution centers for the business. This has worried many analysts who fear it can't win against Amazon (AMZN). But the Goods business has traditionally had a very high take rate and these centers will definitely help them lower their costs.
  • International, although not profitable yet, still saw revenue growth in the last year of 10%. Mobile is also under-penetrated internationally.

The bottom line is that Groupon's run might not be over. Although the third quarter is not traditionally strong, its fourth-quarter performance could drive this stock into the high teens -- especially if it can show strong earnings from Europe.

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