RetailMeNot Is Just Getting Started

RetailMeNot (NASDAQ: SALE  ) has not received significant attention in the seven months since its IPO. While the company has been flying under the radar, its shares have not; RetailMeNot is up over 50% since its IPO and reached a new all-time high following the release of its fourth quarter earnings. Even after this pop, shares of RetailMeNot are still not trading at the valuation multiples of many of its Internet-based peers.

RetailMeNot's fantastic results
RetailMeNot's fourth quarter results validate the strength of its business model and demonstrate just how much potential there is in the win-win model of saving customers money by providing discounts and linking the customer directly with willing retailers. The quarter's impressive growth can be summed up with three numbers:

  • 50% organic revenue growth
  • 85% international revenue growth
  • 179% mobile revenue growth

This staggering growth is supported by a host of other positive metrics, including steady growth in traffic, revenue per visit, and app downloads. In short, this is a company firing on all cylinders on a quest to get a meaningful share of what it believes is a $28 billion market opportunity.

The midpoint of management's range for organic revenue growth in 2014 is 27%, which further demonstrates the fact that the growth story is far from over.

Reasonable valuation
Despite generating gross margins of 95% and consistently producing positive net income, RetailMeNot's valuation remains very attractive relative to its peer group of consumer-facing websites that connect customers and businesses:

  SALE OPEN Z YELP TRIP
Price to sales ratio (TTM) 10.1 9.0 17.8 27.2 13.9
2013 revenue growth 45% 18% 69% 69% 24% 
Analysts' 2014 revenue growth forecast 29% 19% 49% 54% 26%
           
Forward price to earnings ratio 30.8 31.4 117.3 242.7 33.3
Analysts' five year earnings growth projection 20% 14% 42% 43% 20%
Price to earnings growth ratio 1.5 2.2 2.8 5.6 1.7

Source: Yahoo! Finance-February 16, 2014

Of this peer group, only Open Table (NASDAQ: OPEN  ) trades at a lower price to sales ratio. RetailMeNot trades at a lower forward P/E ratio than both Open Table and Trip Advisor (NASDAQ: TRIP  ) despite reporting higher 2013 revenue growth and higher anticipated 2014 revenue growth than its peers.

Looking further at earnings, RetailMeNot trades at the lowest PEG ratio of this peer group listed above. It is interesting that Zillow (NASDAQ: Z  ) commands a valuation that is double that of RetailMeNot on a PEG ratio basis; considering that this ratio already factors in Zillow's higher growth projection, it is a bit difficult to understand the disparity.

Both RetailMeNot and Zillow are fantastically disruptive businesses that are changing the way that consumers shop (with coupons and for homes, respectively). Both operate highly successful websites and apps that are popular with consumers and have tremendous growth opportunities in the future. However, the biggest difference is that RetailMeNot is consistently profitable and trades at a reasonable forward P/E ratio of 31.

Significant room for industry consolidation and disruption
Part of RetailMeNot's tremendous growth opportunity is the sheer size of fragmented markets for attracting consumers through coupons, cash back, affiliate programs, and other means of being compensated for connecting buyers and sellers. This highly fragmented market creates a couple of opportunities. First, RetailMeNot has a history of making prudent acquisitions of businesses that drive more traffic to the company's core business or expand its reach geographically. RetailMeNot's strategic acquisition of Zen Deals in 2013 is an excellent example of how strategic acquisitions can drive more customers to RetailMeNot's website.

Second, RetailMeNot's scale in an environment full of smaller companies allows it to innovate in ways that others cannot. Last quarter, RetailMeNot leveraged its popular mobile app and mobile website to allow partner retailers to deliver in-store offers to customers in 35,000 store locations. Relationships with major retailers and the scale that RetailMeNot has reached have created a moat that has never existed in the world of coupons. 

RetailMeNot is a buy
Even near an all-time high, RetailMeNot is a buy. A fantastic fourth quarter has proven just how strong this business is. Despite shares rising over 50% since the IPO last summer, the company still trades at a very reasonable valuation compared to its peer group and growth projections. Add in the ability to drive additional growth thanks to ongoing growth in e-commerce, industry consolidation, and further innovation, and there is a lot to like about RetailMeNot.

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