Daily deals site Groupon (NASDAQ:GRPN) surged after Priceline (NASDAQ:BKNG) announced that it is acquiring online reservation service provider OpenTable (UNKNOWN:UNKNOWN). As a result of this consolidation, Groupon will have to face one less rival in an industry where competition is heating up of late. This was probably what investors were thinking as Groupon shares rose more than 5% after the announcement.
Priceline's announcement comes as a welcome relief for investors, as Groupon has been battered badly this year. The daily deals player has lost almost 45% of its value in 2014. Is there any hope for the company going forward? Let's find out.
While investors might think that Priceline's acquisition of OpenTable is good news for Groupon, it might give rise to more competition instead. Groupon has a restaurant reservation service, known as Groupon Serve, which it launched last year. Using this service, customers are able to find and book tables, and also receive a discount on their restaurant bill.
Since Priceline is a hotel and flight reservations company, the acquisition of OpenTable, a restaurant reservation player, is a threat for Groupon. OpenTable seats over 15 million diners every month at more than 31,000 restaurants across the world. It has seated more than 125 million people globally through its mobile platform in six years. So, Priceline will now be able to provide an integrated solution to customers, who can book flights, hotels, and restaurants seamlessly on a single platform.
Priceline can use this solid foundation to amplify its presence in the restaurant reservations space, which comes as a natural addition to flight and hotel bookings. So, Groupon Serve will now have a more resourceful competitor .
Moreover, in terms of size and business operations, Priceline is very big. With a market cap of more than $60 billion, Priceline claims to book hotels for more than 1 million guests on average every night. Priceline has a very wide reach, having more than 480,000 properties in more than 200 countries, making it a comprehensive player and a potent threat for Groupon once OpenTable is introduced to this broad distribution network.
The positive side
Groupon is increasing its marketing expenses to stay competitive. This has resulted in solid growth in several key metrics in the first three months of 2014. Its local marketplace now has over 200,000 deals, and the company is busy spreading awareness. Moreover, Groupon's international business is also showing signs of revival.
In fact, its international business has been the driving force behind revenue growth. Moreover, Groupon's acquisition of Ticket Monster last year is turning out to be a key driver for its international business.
For the past year, Groupon focused on establising its business in Europe, the Middle East, and Africa, which was deteriorating since 2012. As a result, Groupon reported four consecutive quarters of billings growth. Among other regions, the company is seeing very high growth rate in Asia, with a 123% increase in its business. This was mainly driven by the acquisition of Ticket Monster.
Management has three key objectives lined up for fiscal 2014. First, it will be accelerating local growth in North America and abroad. Second, the company plans to improve the gross margin and its operating efficiency. Finally, it will achieve further stability in international operations and reduce losses in other regions of the world.
Going forward, it anticipates revenue acceleration in the double-digits by the year end in North America.
The bottom line
Groupon is making aggressive investments to stay strong, and it needs to do this because of stiff competition from the likes of Priceline. The company might see some short-term weakness in the bottom line, but it should improve in the long run. The company's stock is currently trading near its 52-week low, and considering that its bottom line is expected to grow at a compound annual growth rate of 26% for the next five years, it might prove to be a good buy.
Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple and Priceline Group. The Motley Fool owns shares of Apple and Priceline Group. 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.