Source: Groupon.
Groupon (GRPN 8.21%) has fallen by more than 50% from its highs of the year, and the company looks attractively valued on a sales basis when compared to bigger and more successful e-commerce players Amazon (AMZN -1.65%) and eBay (EBAY 0.31%). Is Groupon a buying opportunity for investors?
A discounted price
Comparisons between Groupon and companies such as Amazon and eBay are certainly tricky. While Groupon is still trying to find a sustainable and profitable business strategy to compete in the industry, both Amazon and eBay have well-defined and successful business models.
GRPN Revenue (Quarterly) data by YCharts.
Still, it's important to consider that Groupon has outgrown Amazon and eBay in terms of revenue during the last several years, yet the company is trading at a material discount to its peers. Groupon carries a price-to-sales ratio around 1.6, versus 1.9 for Amazon, and a much higher 3.7 for eBay.
While eBay is not growing as rapidly as Amazon or Groupon, the company is far more profitable. eBay's Marketplace operations are dedicated to simply matching buyers and sellers. The company is not a retailer, so it doesn't need to incur expenses such as inventory and logistics to the same degree as Amazon. Besides, eBay's PayPal division is a highly profitable and growing segment of the business.
Amazon has chosen a different path. The online retailer is all about competitively low prices and investing for growth, even if this means operating with razor-thin profit margins. Amazon has a gross profit margin in the area of 27.8% of sales versus a much higher gross margin around 68.4% of sales for eBay.
On the other hand, Amazon's strategy has allowed the company to sustain extraordinary growth rates during the last few years, and there is no slowdown in sight judging by recent financial reports. Amazon reported a big increase of 23% in revenue, to $19.74 billion, during the first quarter of 2014 -- quite an impressive growth rate considering the company's size.
Groupon is hardly a match for Amazon and eBay, as the company lacks the competitive strength and proven business model of its competition. Besides, Groupon is still losing money on the net income level. However, from a valuation point of view, the company offers plenty of upside potential if it can manage to improve financial performance.
A bargain deal or damaged merchandise?
Groupon is in the midst of a transformation. The company is expanding into different geographies and business areas via acquisitions. Groupon has recently purchased South Korean e-commerce marketplace Ticket Monster and U.S. fashion site Ideeli, among other deals. Acquisitions are always a source of risk for investors; however, they can also provide big opportunities for growth when done smartly.
Groupon is also broadening its presence in e-commerce by selling consumer products such as razors and vitamins in bulk at discounted prices. This is clearly a low-margin business, but it could do well among Groupon's bargain-hunting audience.
Results from these initiatives have been mixed so far; although revenues are growing nicely, profitability remains under heavy pressure. Sales during the first quarter of 2014 grew 26%, to $757.6 million, versus $601.4 million in the first quarter of 2013. North American sales increased 27%, sales in the EMEA region increased 26%, and revenues in the rest of the world expanded by 23% versus the same period in the prior year.
Gross billings, meaning the total dollar value of customer purchases of goods and services, increased 29% globally, to $1.82 billion in the first quarter 2014. Billings increased 15% in North America, 4% in EMEA, and 123% in the rest of the world, which was mostly due to the acquisition of Ticket Monster.
Although it's nice to see Groupon generating healthy growth at the top line, lack of profitability is still a significant reason for concern. Gross profit increased only 2% to $385.7 million during the quarter, and the company reported an operating loss of almost $20 million, versus an operating gain of $21.2 million in the first quarter of 2013.
There is little visibility regarding Groupon at this stage, and it's probably too early to tell if the company is on its way to a sustainable recovery or simply venturing into different projects as a desperate way to overcome weakness in its deals business.
One thing looks clear, though: Groupon is a case worth watching, because the company's attractive valuation leaves ample room for appreciation if profit margins start moving in the right direction.
Foolish takeaway
Groupon is attractively valued in comparison to bigger and more successful companies like Amazon and eBay. Some of the company's latest initiatives look interesting, and revenues are growing nicely, but insufficient profit margins are still a big reason for uncertainty. It's probably too early to buy Groupon; however, if the company proves that it can deliver improving profitability, it could produce material gains for investors.
