Best GRPN article in a while
Groupon: Opportunity Looking Forward
Nov. 30, 2017 9:36 AM ET
Summary
* GRPN share price has increased 55% since July 31st.
* Management decision-making rewarded by market.
* Company is poised to seize emerging opportunity over the next 5-10 years.
* Millennials and Gen Z are key demographic moving forward.
Groupon (GRPN), the sworn enemy of full priced goods and services everywhere, is a great tool for consumers, often saving them 40%-50% on meals, afternoons with the kids, or weekend trips. Groupon also provides value to companies big and small, growing exposure and driving customers to purchase products and services with special offers. They help consumers, small business, and the larger corporations, a true American tech sweetheart. And its share price is growing at a rapid clip. That’s all gravy. The real question here: is GRPN a sound long investment?
Strong Fundamentals?
A review of Groupon’s Quarter 3 earnings report reveals an important relationship between management decision making and increasing share prices. Managerial competence is an asset that does not show up on the balance sheet, but brings obvious value in the market. On July 31, Groupon and food delivery service Grubhub (GRUB) formed a strategic partnership that allows Groupon users place orders on Grubhub from Groupon, making use of Groupon’s offers and Grubhub’s robust delivery network. Since that date, the company has repurchased 2,384,200 shares. From the time of these decisions, GRPN share price has grown nearly 55%, from $3.76 to Tuesday’s close at $5.82. That rapid growth healthily outpaces the S&P index (SPX) that realized 6.3% growth in the same period. The technology sector, indexed by the Technology Select Sector SPDR ETF (XLK) moved just over 12% in the positive since the 31st of July, from $57.61 to $64.71 in the 4-month span. Keep in mind, these large percentage gains coincide with smaller dollar gains than the aforementioned indices due to the low price of GRPN shares.
The success of GRPN can be traced to successful management decisions in the latter half of 2017, most prominently the Grubhub partnership and share repurchase program, along with the overall success of the market at large. These are the newsworthy items, and there is always more to the story than the big splashes. Behind the high visibility decisions are subtleties that will contribute to continued Groupon success. While Q3 revenue fell 8% year over year, gross profit increased 6%, a discrepancy attributable to an 8%, or $19 million, decrease in SG&A expenditure from Q3 of 2016.
Efforts to automate and streamline organizational structures that drove operational efficiency are beginning to realize quantifiable success. The company expects continue increasing efficiency into the foreseeable future. To enact the shift in emphasis to growth in gross profit measures as opposed to revenue, management is slowly tapering off Groupon’s presence in the Goods space, and focusing on Local markets, which they view as an opportunity that Groupon’s business model is molded to exploit. Revenues continue to decrease in the Goods market, while steadily strengthening in the Local market, a point I will touch upon again later.
In Q3 of 2017, Groupon saw also the continuation of a 2017 trend in growth of North American active customers, defined by the company as unique user accounts that have made a purchase during the trailing twelve months, which has increased steadily in North America this year from 31.1 million in January to 32.5 million as of September. Active customers decreased internationally from roughly 16.7 million to 16.6 million, but showed growth from Q2 to Q3 of 2017. As Groupon expands their Local presence internationally as they have done in North America, expect increases in active customer numbers. The market has healthily rewarded GRPN share price for sound management strategy, mainly the shift in focus to gross profit at the expense of revenue, partnership with Grubhub, and a Q3 share repurchasing program that still holds $135 million of repurchasing power.
Broad Market Opportunity
The numbers above tell a story of a management team that is ready to adapt, and the rewards reaped from that very ability. Equally as important as strong financials and share price growth is the opportunity present in the market in which Groupon operates, and the outlook for its long-term success. We will first establish a snapshot of the Groupon demographic for the coming decade. As the last group of Millennials graduate college and begin their careers, there will be a notable rise in Millennial purchasing power. This is good news for Groupon. According to a 2015 emarketer survey, Millennials are the generation that use coupon websites and search engines to find coupons at the highest rates, 66% and 69%, respectively. Additionally, 45% of Millennials surveyed increased their use of paperless discounts from 2014. These results display the popularity of the services for which Groupon is the most recognizable brand name, among the generation set to experience the largest rise in purchasing power in the coming decade. This increased interest in coupons is due to the ease of accessing specific, personal coupons, and the overall debt ridden situation of the millennial prompting the emergence of a generational trait of thriftiness.
I promised to come back to my argument for the importance Groupon’s shift of focus away from the Goods market and into the Local market. The foundation is set. Here it goes.
My case hinges on the emerging consumer mindset of the Millennial, and of the increasingly relevant Generation Z, and how that mindset will affect future spending habits. The prevalence of technology in the development of Millennial and Gen Z psychology has a profound effect on consumer preference and buying patterns. The younger generations are turning from ownership to sharing-based systems, such as Uber and Airbnb. Another product of the technological age is an increased interest in physical well-being, most likely due to a subconscious anxiety triggered by the unceasing presence of cameras ready to snap a photo of us, combined with the multitudes of beautiful people reaping fame and fortune for nothing but their glowing picture appearing daily on millions of the timelines of the anatomical peasantry. Young people hit the gym more than past generations because they want to be ready for all those pictures, and to look like their favorite empty-headed insta-famous quasi-celebrities. Instagram will raise life expectancy purely through implicit body shaming, but that’s off topic. The last element of the Millennial consumer of note to this argument is the rise of experience-oriented culture and spending. There is an unspoken competition to post the best ‘experiences’. I see it on my phone every morning. Whether it be the Snapchat supremacists, the Instagram demagogues, and even the Facebook crew, everyone silently strives to outdo the rest. Observe the rise of the Selfie Stick, the GoPro, and ever intensifying focus on camera quality in smartphones. Caesar’s Entertainment (CZR) is planning to construct a zip line in Las Vegas to attract this new crowd of spenders. Young people want to post the best snaps and clips of their weekend vacation, trip abroad, or night out.
So how does Groupon take advantage of all this Millennial madness? Simple pursuance of the strategy they have already begun to implement: ditch the goods, chase the local experiences. Local markets for Groupon are experience oriented, offering deals for local restaurants, beer tastings, winery tours, health & fitness programs, gym memberships, and a slew of other similar services. Increased emphasis on Local markets, both domestic and international, will key into that Millennial demographic with growing purchasing power and a thirst for these very offerings, demonstrated in the survey data detailed above. Deals for local gyms and fitness groups will find the most health conscious generation alive, all ready to try a new yoga class or save on a gym membership.
Partnerships with local eateries, bars, tour and excursion groups, and even hotels could attract a thrifty generation that wants to share their experiences eating, drinking, and travelling more than any that came before them. When opportunity in the market meets a well-developed strategy to exploit it, the results will follow. Active customer growth will drive revenue, and at a lower cost in the Local market as opposed to the Goods market, further increasing gross profits. Share price will follow. And it will all happen with a generation poised to grow into the highest spending age group and maintain that position for a long time to come.
Conclusion
Groupon share price continues to increase as 2017 nears conclusion, increases on the back of a competent management team. But past increases signal little about the direction of the future. Strong fundamentals, such as gross profit growth, provide a solid base. Due to a marketing emphasis on Local markets, shifting from Goods, Groupon has the opportunity to capture new customers and new revenue from an experience craving, health enthusiast, and thrifty Millennial generation as their purchasing power grows to the largest among any age group. Groupon is poised to grow, and exhibits the managerial strategy and adaptability to do so.
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