Sometimes you just can't win for losing. The negativity surrounding Groupon (NASDAQ: GRPN ) for much of 2012 has been its reliance on what it does best: Offer customers around the world online coupon deals. The problem, according to many analysts -- and many investors, based on Groupon's negative stock performance year to date -- has been "deal fatigue."
Irrespective of deal fatigue silliness, the broader concern for Groupon investors is having too many revenue eggs in one basket. Relying too heavily on one revenue stream is always worrisome, regardless of the industry. But when you consider the fact that Groupon's core business -- online deals -- is crowded with some big-time heavyweights, including Amazon.com (NASDAQ: AMZN ) , Google (NASDAQ: GOOGL ) , and Facebook (NASDAQ: FB ) , the concerns take on added significance.
Groupon's efforts to diversify
To beleaguered CEO Andrew Mason's credit, he's taking definitive steps to broaden Groupon's product reach. In spite of calls for Mason's ouster -- you may recall earlier this month, Groupon stock dropped 9% when shareholders learned Mason was staying (ouch!) -- he and his team are making some good moves.
Groupon's Q3 earnings call confirmed that the steps it's taking to expand beyond online coupons is working. Groupon had a break-even third quarter , compared to a loss of $54 million last year, and has added multiple acquisitions and revenue-enhancing services in the past several months, including its most recent purchase, online channel management provider CommerceInterface .
What's a CommerceInterface?
If you haven't heard of privately-held CommerceInterface, you're not alone. Groupon, along with big-time online retailers Amazon.com and eBay (NASDAQ: EBAY ) , uses CommerceInterface's technology to manage its entire online sales processes -- manufacturing, distribution, retail customers, you name it.
Though financial terms weren't disclosed, Groupon's ensured that the CommerceInterface tools will soon be Groupon's alone to utilize for its rapidly growing online retail alternative, Groupon Goods. Why the need for the company to take such a dramatic step of buying technology from its former vendor? Because Groupon Goods is already generating an annual run rate of $1.5 billion in sales -- and growing.
Groupon has given CommerceInterface's other online retail customers (like Amazon and eBay) six months to find themselves another technology partner. The exclusivity of Groupon's new technology is already being cited as a competitive advantage by some analysts, particularly as Groupon's most recent acquisition comes on the heels of several other product-expanding purchases. Groupon's mobile-specific application for Apple's iOS gadgets, low-cost small business merchant payment solutions, and even a brick-and-mortar concept store in Hong Kong, are all recent additions to its growing service offerings.
Not everyone's enamored with the Goods
When Groupon first introduced its Goods service, naysayers immediately bemoaned the slim margins that the online retail business generates. As it stands, Groupon's gross margins are through the roof, as you'd expect, and its Goods service will negatively impact those results, to be sure. If that were all Groupon brought to the investment table, shareholders would have a legitimate complaint. As it happens, Goods is a supplemental offering for Groupon, not its sole revenue alternative.
The notion that the growth of Groupon's Goods business line, recognizing its dilutive effect on overall margins, is a good thing in the long run, is being lost on many a shareholder, as the recent rumblings of a class action suit will attest to. Glancy, Binkow & Goldberg, a law firm specializing in shareholder lawsuits, is investigating allegations that Groupon misled shareholders by increasing revenue from its non-core business (Goods), and its expanded revenue mix would result in lower margins. Apparently, the 26% jump in share price the past month hasn't appeased some Groupon shareholders.
Where from here?
Yes, margins for Groupon's new and growing ancillary business lines are less than its core, online coupon sales; that should surprise absolutely no one. But competing with Facebook's Coupon offering, Amazon.com's LivingSocial and AmazonLocal, let alone Google Deals, with no other sources of revenue, would be the beginning of the end for Groupon.
The acquisition of CommerceInterface confirms Groupon's commitment to becoming a full service, small business solutions provider here and abroad, and that's just as it should be. Looking for an aggressive growth investment in 2013? If you can get past the margins, Groupon's worth a look.
Groupon's story is one of the American Dream. The company went from 400 subscribers in 2008 to over 200 million today. Groupon's success certainly hasn't been shared by investors. Will Groupon live out its American Dream, or leave shareholders empty-handed? In order to answer that question, our analyst has compiled a premium research report with in-depth analysis on whether you should buy or sell Groupon right now, and why. Simply click here now to get started.