3 Reasons Now May Be the Time to Buy Groupon Inc.

Groupon is growing faster than some peers and has a chance to reach scale in its most important business. What else could you want?

Jun 7, 2014 at 9:00AM

Groupon (NASDAQ:GRPN) has been the subject of negative news for a while. At first, the company's business model was questioned. In theory, any of the bigger e-commerce players could copy Groupon's deals. When the company moved into the goods business, investors wondered if Amazon.com.com (NASDAQ:AMZN) wouldn't swat this gnat with better pricing. However, Groupon is making progress, and there are three reasons to believe that long-term investors may want to add the company to their buy list.

Better than Amazon.com or eBay
Though it might seem crazy to compare Amazon.com and eBay (NASDAQ:EBAY) to Groupon, the three companies are more closely aligned than some may think. For all of Amazon.com's new ventures and hopes for the future, the company currently gets well more than 60% of its revenue from the sale of electronics and general merchandise.

Where eBay is concerned, the company's PayPal unit is growing fast, but the marketplace business still makes up more than half of revenue. Groupon gets 56% of its revenue from its deals business, but the goods business is at 44% and growing much faster. In fact, if things stay as they are, in the next couple of quarters, deals will be Groupon's primary business.

When it comes to growth comparisons, it doesn't make sense to look at just revenue growth from each company. The reason is, eBay's primary function is to enable transactions, whereas Groupon will soon join Amazon.com as primarily a retailer.

There are obviously huge differences in size between the three companies, but nevertheless the comparison is somewhat startling. Amazon.com's primary merchandise business grew by 27%, year over year, in the last quarter. EBay's enabled commerce volume increased by 24%, whereas Groupon's goods business increased by more than 100%.

Even if we look at straight top-line growth, Groupon comes out on top with a 26% increase, compared to 23% at Amazon.com and 14% from eBay. Size differences aside, the first reason to buy Groupon is the company's growth is outpacing both Amazon.com and eBay.

Better because of the rest
One of the primary reasons Groupon is growing fast is because of a massive improvement in the segment the company calls "Rest of World." Though the company's U.S., European, and Middle East businesses are growing at better than 25% per year, the rest-of-world business posted a 23% increase in revenue.

On the surface, it might sound like Groupon's rest-of-world business is falling behind the company's other divisions. However, the second reason to buy Groupon today is the improvement in the rest-of-world business. Amazon.com has consistently reported international sales growth -- 18% last quarter. EBay's international marketplace volume growth, at 13%, exceeds its 11% domestic growth. However, Groupon's rest-of-world business has struggled for the better part of the last year.

In fact, the division's gross billings vacillated between a negative 2% and negative 16% until the current quarter. In the last three months, this division posted a 133% increase in gross billings. This might be one of the most misunderstood parts to the Groupon story. The company is investing in future growth, and once the business reaches scale, the improvement is astounding.

The next division to reach scale
The third and most important reason investors should consider buying Groupon today is connected to the company's goods scalability. As Groupon tries to grow its goods business to a sufficient size, the division's gross margin looks almost laughable.

Considering that Amazon.com's gross margin is about 29%, and eBay's competitive advantages leads to a 68% margin, Groupon's goods gross margin of 6.5% seems like a misprint. However, the goods business is in its infancy, and that's the point.

Groupon is trying to beat Amazon.com at its own game by offering deep discounts on merchandise. This is risky. Amazon.com has size on its side. But Groupon's bigger rival is betting on other businesses for its future growth. Where eBay's huge margins are great for investors, the company still has to rely largely on its marketplace members to choose what is available.

The bottom line
Groupon's Deals business is growing revenue per year at a much faster rate than Amazon.com or eBay. The company's rest-of-world business seems to have reached a certain scale, and the goods business could be next. While the company has challenges ahead, management seems to believe in the value of the shares. In fact, the company repurchased shares at nearly double the current stock price over the last year.

While share repurchases aren't always timed well, Groupon seems on its way to better profitability. Long-term growth investors should consider adding Groupon to their watchlist today.

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Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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