Shares of RetailMeNot (NASDAQ: SALE ) fell more than 7% on Wednesday May 7, 2014 in response to disappointing first quarter results, capping a decline of almost 40% since the highs reached during late February. Which begs the question: has the investment thesis in RetailMeNot really changed that drastically in the past couple of months? To find out, it is important to analyze the results in detail to determine any impact the long-term investment thesis.
Phenomenal revenue growth
RetailMeNot reported revenue growth of 51% during the first quarter, which topped analyst expectations as well as Coupons.com's (NYSE: COUP) 41% growth and Groupon's (NASDAQ:GRPN) 26% growth. Perhaps more important than the 51% growth is the variety of drivers that fueled this growth:
- Total traffic increased 26% to 155 million visitors
- Net revenue per visit increased 20% to $0.39
- International revenue grew 56% to $14 million
- Total mobile traffic (including both app and mobile site) increased 259% to 174 million sessions/visitors
- Email subscribers grew 107% to 20.4 million
RetailMeNot is generating solid growth in every dimension of revenue generation that investors are looking for, including more traffic, more revenue per visit, international growth, and successful monetization of mobile. The year-over-year growth rates noted above are strong validation that the company is achieving its goal of becoming a dominant player in the coupon megatrends toward digital and mobile.
Profitability growth, too!
RetailMeNot reported adjusted EBITDA growth of 17% and positive adjusted earnings per share of $0.20. EPS came in a penny above analyst expectations, but perhaps the more significant distinction is the fact that RetailMeNot's EPS is consistently positive while peers such as Coupons.com and Groupon reported losses during the first quarter.
Margin pressures and lower forecasts
With a continuation of the fantastic growth story, it is logical for investors to question the disconnect between quarterly results that beat expectations and RetailMeNot's stock chart:
Pointing out the fact that RetailMeNot has fared much better than Coupons.com, Groupon, and similar websites is not very reassuring for shareholders. So what is causing the decline?
For RetailMeNot, the company's EBITDA margin of 35% during the first quarter and management commentary about "further investment" to support growth has led to a reduction in analyst EPS estimates for 2014 from $1.08 a week ago to just $0.98 today.
Mixed messages from the market
In contrast to RetailMeNot's post-earnings decline, shares of Coupons.com increased following the release of its first quarter earnings despite slower growth than RetailMeNot and a continuation of the company's inability to generate profits. Meanwhile, Groupon plunged to 52-week lows following disappointing guidance. Monitoring these direct and indirect competitors is a useful way to assess whether the broader digital deal market is facing new pressures.
Quite frankly, the decline in share price of RetailMeNot makes very little sense. Revenue growth remains remarkably strong, the growing market opportunity remains intact, and the company remains profitable. Additionally, increased expenses to build and market the RetailMeNot brand and create new functionality on the company's web and mobile platforms are the right strategic moves for the company over the long-term. The market may not like short-term contraction of EBITDA margins and the related impact to 2014 EPS, but this spending positions the company for even more growth in the future.
To put the current share price into perspective, RetailMeNot is trading at 29 times estimated 2014 earnings and 20 times estimated 2015 earnings (based on 2015 analyst estimates of $1.40 per share). This may not seem "cheap" on the surface, but when you layer in the company's growth trajectory the share price is quite reasonable even when using a reasonable 25% five-year growth rate:
|Current share price||$27.98|
|Estimated 2014 EPS||$0.98|
Forward price to earnings
|Estimated 2015 EPS||$1.40|
|Price to 2015 earnings||19.99|
This simple illustration helps provide a sense of the zone in which RetailMeNot is valued and the significant upside in share price from today's prices.
Few companies can profitably create a win-win-win situation where vendors, the company, and customers all come out ahead. RetailMeNot is one of these companies, and its consistent profitability sets it apart from peers such as Coupons.com and Groupon. With the long-term picture intact and an attractive valuation, RetailMeNot remains a compelling investment idea.
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