Groupon Inc. Shares Might Be the Best-Valued Stock in the Social Space

Groupon (NASDAQ: GRPN  ) reached a high of nearly $12 per share in January, and year to date, the stock is down approximately 55%. While the whole social space, including, but not limited to, Angie's List (NASDAQ: ANGI  ) , Yelp (NYSE: YELP  ) , and LinkedIn (NYSE: LNKD  ) , have also corrected, Groupon trades at a substantial discount to the sector.

Groupon's growth story is still intact
Groupon's active customer base continues to grow, recording 24% year-over-year growth. The breakdown comprises 21.8 million members in North America, 14.5 million in EMEA, and 15.5 million in other areas of the world. For the quarter, active deals exceeded 200,000 globally, compared to more than 140,000 at the end of the fourth quarter of 2013. In addition, the company has a very healthy balance sheet with nearly $1 billion in cash and cash equivalents

Why has Groupon's stock corrected by so much?
One reason for the big decline might be that the market is rethinking Groupon's growth prospects, adjusting the company's valuation to the downside. For what reason?

According to a report by IBISWorld, while the daily deals industry in 2013 was worth $3.3 billion in revenue (recording 15% annual growth), the sector's growth is projected to plummet and remain constant at 4% annually until 2018, when the industry as a whole will be worth no more than $4 billion in revenue.

However, even if these projections turn out to be true, there is nothing preventing Groupon from increasing market share within the sector and growing faster. For example, Groupon's marketplace ("Pull") continues to gain traction. In March 2014, approximately 9% of total traffic in North America was searched, with customers that searched spending significantly more than those that did not. 

The company is also gaining traction in mobile. In March 2014, 54% of global transactions were completed on mobile devices. Over 80 million people have now downloaded Groupon mobile apps worldwide, with over 10 million people downloading them in the first quarter alone. As a result, the company has increased its full year outlook, and now expects Adjusted EBITDA to exceed $300 million.

Valuation is the key
Putting growth issues aside, even if the sector sees very low growth over the next several years, the main question is if the stock is currently a bargain after its recent 55% tumble.

To come to a conclusion, we have to compare Groupon to other companies in the social space. Granted, that this is not exactly an apples-to-apples comparison, but nevertheless it could give clues as to whether Groupon is worth buying at current levels.

 

P/E (12-month forward)

Price/Sales (trailing)

Price/Sales 2014

Price/Sales 2015

Market Cap

Revenue 2014

Revenue 2015

Groupon

22

1.45

1.25

1.08

$4 billion

$3.2 billion

$3.68 billion

LinkedIn

62

11.27

8.9

6.7

$19 billion

$2.13 billion

$2.82 billion

Yelp

191

17.7

12.7

8.9

$4.67 billion

$366 million

$524 million

Angie's List 

37

2.22

1.98

1.59

$655 million

$330 million

$412 million

Using average analyst estimates, Groupon currently has the lowest price-to-sales multiple of any of the stocks in the table above. For example, LinkedIn currently sells at a multiple of 11, when Groupon sells for 1.45.

Even more interesting, Groupon trades at a multiple of 1 with 2015 estimates. But, even taking EPS as a metric, Groupon has the lowest 12-month forward P/E among the group. While the price-to-sales multiple is not the ideal metric by which to judge stocks, it is very good when a company has little or no profits, as is the case with all of the above stocks.

Bottom line
Looking at the social space, Groupon has one of the lowest price-to-sales multiples in the industry, plus one of the lowest 12-month forward EPS multiples.

So considering Groupon from a pure valuation perspective, it is probably one of the best-valued stocks in the social space, with good protection to the downside at current levels. In addition, the company's share repurchase program should help EPS acceleration in the long term, even if growth slows over the next several years.

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Comments from our Foolish Readers

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  • Report this Comment On June 13, 2014, at 12:01 PM, RobertoMurphy wrote:

    I agree with this article. GRPN has a lot of upside. However, the only issue I see is the illegal naked shorting of the stock.

    "Notice that on a single trading day (05/14/2014), there were over 2.4 million GRPN transactions that generated an FTD. The is not 2.4 million shares. Its 2.4 million FTDs!!! Thus, if we assume the average transaction was 100 shares, one can conclude there were conservatively 240 million shares that that went short GRPN. How's that even remotely possible?"

    http://seekingalpha.com/user/894149/instablog

  • Report this Comment On July 17, 2014, at 1:22 PM, DavidDavis wrote:

    I agree and I would like to add that ALPHALA is a good possibility to invest

  • Report this Comment On July 18, 2014, at 5:48 AM, NinaSerentsia wrote:

    I agree with post above me mmj market could be good

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