Deep Dive – $GRPN : Clipping a Coupon

by Enis September 26, 2013 1:02 pm • Commentary

This is the second in our new series of Deep Dive posts.  GRPN seems an appropriate choice given its roller coaster ride over the last 2 years.


GRPN IPO’ed in late 2011 to abundant excitement.  That excitement quickly turned to disappointment, illustrated by the lifetime chart:

GRPN weekly chart, Courtesy of Bloomberg
GRPN weekly chart, Courtesy of Bloomberg

The stock has staged an impressive turnaround in the past year, though it’s still far from the price that investors initially paid on GRPN’s debut.

Clearly, the marketplace has had a difficult time placing an appropriate value on GRPN shares.  So let’s start with the basic facts before getting into the nitty gritty.

Basic Company Facts:

  • GRPN is a “deals” site that has been in existence since October 2008.  It is based in Chicago with about 12,000 employees
  • It’s a $7.8 billion market cap stock, with about $2.5 billion in annual revenues, 50% from the U.S., 50% from international operations.
  • The company is expected to earn $0.13 per share in 2013, 0.28 in 2014, and 0.40 in 2015, on sales of $2.55 billion, $2.94 billion, and $3.24 billion respectively.
  • The company has more than 42 million active users across the globe, up from around 38 million a year ago.

Company Turnaround:

The stock was left for the wayside less than a year ago, with co-founder Andrew Mason eventually bumped from his executive position this past February.  So what’s the reason for the turnaround?  Well, there are of course many reasons (and below $3, the stock was a very cheap option given its $1 billion-plus cash on the balance sheet and no debt).  But for starters, here is the company’s own description of its operations from its most recent 10-Q:

Groupon, Inc. and subsidiaries (the “Company”) is a local commerce marketplace ( that connects merchants to consumers by offering goods and services at a discount. The Company also offers deals on products for which it acts as the merchant of record. The Company, which commenced operations in October 2008, sends emails to its subscribers each day with discounted offers for goods and services that are targeted by location and personal preferences. Consumers also access deals directly through the Company’s website and mobile application.

The distinction between the business of connecting merchants to consumers, vs. the business of offering deals on products where it is a merchant of record is important.  The first business is GRPN’s bread and butter, where it essentially offers coupons to its members for use at local merchants.  GRPN takes a cut of those revenues.  But GRPN the selling and marketing expenses associated with continually growing that coupon business, particularly in the fact of increased competition, forced GRPN to reconsider its growth strategy.

Since 2012, GRPN has started to focus on directly selling goods to the consumer, primarily in the U.S.  At the same time, the company has become more income-focused (as opposed to just targeting revenue growth) on its coupon business.  The overall business has shrunk as a result, even as total active users have increased:

Trailing twelve months ended June 30,
TTM Active customers (in thousands)
TTM Gross billings per average active customer
The increasing shift to the Direct selling business is also quite evident from the income statement:

Screen Shot 2013-09-25 at 5.58.15 AMScreen Shot 2013-09-25 at 5.53.45 AM


One major concern is that the margins on the Direct business are only around 12%.  While a good portion of the marketing and SG&A expense are no doubt attributable to the Third Party and other business costs, even if only a small part of those operating expenses are attributed to the Direct business, its future profitability path looks quite uncertain at these levels.  Here is the crux, again from the company’s own management:

Additionally, our Goods category has lower margins than our Local category, primarily as a result of shipping and fulfillment costs related to direct revenue transactions.  We believe that direct revenue transactions in our Goods category will increase in the future in the EMEA and Rest of World segments as we build out our global supply chain infrastructure.
While management acknowledges the lower margins, their clear hope is that they can be more efficient as their revenues increase.  However, GRPN’s shift has also been forced upon it.  The coupon business became extremely competitive, so the Direct GRPN sales business has been emphasized.  Yet, the Direct business is not devoid of competition either (think AMZN localized).
Optimism on Mobile:
The one point of optimism is here:
We believe that increases in transaction activity on mobile devices and in the number of deals that we offered contributed to the growth in revenue for our North America segment. In addition, we target customers through our daily emails by sending them deals for specific locations and personal preferences, which we believe contributed to the revenue growth.
GRPN investors are quite excited about the mobile growth for the company.  Almost 50% of GRPN transactions are now conducted by phone.  GRPN is a clear mobile leader.
My Concluding Thoughts:
But overall, betting on GRPN is betting on very successful execution of a difficult business plan.  I say difficult because the company is competing with the Internet retail behemoths (AMZN, EBAY) in the Direct selling business, and with tight margins at the start.  There are too many things that seemingly have to go right for GRPN in the next couple years to justify a $15-$20 stock price.  Given the inherent risks, I view it as a situation where the potential reward doesn’t justify the risks.