Here’s Why Legg Mason Likes Groupon

The ouster of Groupon (NASDAQ: GRPN  ) founder and former CEO Andrew Mason wasn't a surprise. Nor was its timing, following a disappointing Q4 and fiscal 2012 earnings report. With Groupon's search for a new CEO in full swing, now's a good time to sit back and watch it from the sidelines, right? According to the chairman of Legg Mason's Capital Management unit, Bill Miller, there's no sense waiting: Groupon's an attractive alternative right now.

What's there to like?
Even as Groupon posts negative quarterly earnings -- it's lost about $723 million the past three years alone -- an already impressive horde of cash continues to grow, and now stands at about $1.2 billion. Thankfully, Groupon's solid cash from operations results are adequate to cover the costs associated with conducting business. And all that cash is especially impressive when you consider Groupon carries absolutely no debt.

Too often, analysts forget Groupon's strong balance sheet, and focus instead on the growing competitive environment of the daily deals business, the new but low-margin Goods unit, and Mason's inability to drive shareholder value. These are legitimate concerns, and they're also why Miller's comments are so refreshing. Finally, an analyst has awakened to the fact that $1.2 billion in cash can buy Groupon what it needs most: time.

In a recent CNBC interview, Miller summed up Groupon this way:

They have no debt; they have an enormous addressable market. Expectations are low. The stock is cheap.

And Miller isn't some fresh-faced junior analyst just out of school: His track record of beating the S&P makes him the envy of his peers.

Competition's tough, but so is Groupon
It's easy to blame Mason for Groupon's woes, and his aloofness and seeming lack of concern for Groupon's share-price troubles gave investors plenty of reasons to gripe. But Mason initiated several strategic steps that make a lot of sense for Groupon going forward, even if some analysts choose to ignore them.

Some Groupon analysts have bemoaned what they call "daily deal fatigue" -- the notion that Groupon's bread-and-butter market is becoming saturated. When Mason conceived of the online coupon concept, Groupon didn't have to compete with the many major players who now crowd the deals space. Amazon.com (NASDAQ: AMZN  ) decided to invest $175 million in deals provider LivingSocial a couple of years ago, in addition its own AmazonLocal service. Even with recent losses on its LivingSocial investment, Amazon's online deals aren't going away.

Google (NASDAQ: GOOGL  ) quietly followed with its own Offers service about a year ago. Though a bit slower to the deals game, Google Offers gives customers discounts on an assortment of goodies, just like Groupon and Amazon. But Google has effectively woven Offers it into its world-dominating Android OS, and provides users with a host of free offers, too.

Facebook (NASDAQ: FB  ) is another heavy hitter new to the online deals game, introducing its own Deals service a couple of years ago. Facebook's need to generate revenues from its 1 billion users is well-documented. Like Mason's vision for Groupon, Facebook Deals is another way for CEO Mark Zuckerberg and team to generate value for shareholders. And after a rough post-IPO road, Facebook's product and service expansion efforts are beginning to pay off. Groupon's? Not so much.

Why Groupon offers "tremendous" opportunity
How does Groupon win in a saturated market, with the biggest of the big hitters nipping at its heels? Like competitors Amazon, Google, and Facebook, Groupon is now able to offer customers new product alternatives. Groupon Goods, low-cost merchant payment solutions, and mobile apps for Android and iOS are a few ways Groupon can generate revenue beyond online coupons. And with Groupon's stellar balance sheet, covering expenses associated with product roll outs, and even developing new solutions, are easily managed.

If you're in search of an established company with strong, consistent profit growth, Groupon isn't your best option right now. Groupon needs to get its alternative revenue streams primed to make significant, ongoing contributions to its bottom line first, and that's going to take a while. But as Miller points out, a strong balance sheet buys Groupon time, and that's why it's worth a look for long-term growth investors.

While the Groupon story is definitely one of triumph on a business level, its success most certainly hasn't been shared by investors. Company shares have fallen nearly 70% over the past year and left investors panicked. Will this company 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.

 


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 18, 2013, at 4:18 PM, MMCapitalMgmt wrote:

    I don't understand these points.

    "How does Groupon win in a saturated market, with the biggest of the big hitters nipping at its heels? Like competitors Amazon, Google, and Facebook, Groupon is now able to offer customers new product alternatives. Groupon Goods, low-cost merchant payment solutions, and mobile apps for Android and iOS are a few ways Groupon can generate revenue beyond online coupons. And with Groupon's stellar balance sheet, covering expenses associated with product roll outs, and even developing new solutions, are easily managed."

    In other words, you just claimed that Groupon has no competitive advantage and that all of its revenue streams are susceptible to competition with no barriers to entry.

    Those competitor names have much stronger brands, much stronger outlets and can compete on price against Groupon.

    If Groupon isn't profitable now, how on earth do you expect it to increase margin while competition gains market share and forces prices lower.

  • Report this Comment On March 18, 2013, at 6:04 PM, timbrugger wrote:

    MMCapitalMgmt,

    Actually, I didn't say "no competitive advantage," I said, "...Groupon can generate revenue beyond online coupons." For example, aris Groupon alone in the merchant payment solutions industry? No. But it has a competitively priced alternative, and is expanding into other, ancillary markets.

    Groupon doesn't need a new, as-of-now-undiscovered product to succeed; just a solid line-up of products and services that serve its market.

    Thanks for the post! Tim.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2318692, ~/Articles/ArticleHandler.aspx, 10/24/2014 10:58:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement