Groupon (NASDAQ:GRPN) is in the midst of a transformation, and results have been mixed so far. Profitability remains under pressure, so the company is clearly a risky investment at this stage. On the other hand, revenues are growing strongly, and Groupon stock offers substantial upside potential from current levels. Let's take a look at Groupon stock from both a bearish and bullish perspective.
The bear case
Groupon wants to be considered a global marketplace that can be accessed from any device at any time, not just a daily-deals service. Management intends to attract users to the platform searching for opportunities versus the old approach of sending daily deals via email.
Groupon is transitioning its business from primarily a "push" model that generates demand by emailing offers to customers to more of a demand fulfillment, or "pull" model, enabling customers to search for goods and services through its websites and mobile applications, and also via search engines.
This new focus makes sense when considering industry trends, but it's important to keep in mind that the company is approaching this transformation from a position of weakness. Groupon's traditional strategy is quite easy to replicate, and it's hard to build a profitable business when you're facing growing competition, and service differentiation is notoriously difficult.
Many users were finding Groupon deals irrelevant, and merchants were also dissatisfied with Groupon's business proposition. It's good to see the company changing course before it's too late to do so, but we need to keep in mind that Groupon is transforming itself out of necessity. Also, while Groupon is making considerable progress when it comes to sales growth, the company is still losing money at the operating level, and this is a major reason for concern.
Groupon reported an operating loss of $14.8 million during 2014. This is not such a big deal -- excuse the pun -- for a company making almost $3.2 billion in revenues and generating positive cash flows. However, it's hard to tell what level of profitability Groupon will be able to sustain in the future.
The bull case
On the other hand, management is doing a sound job at delivering revenue growth, and several key operating metrics are moving in the right direction. As long as revenues are growing rapidly and customers are increasingly attracted to the platform, spreading fixed costs on a growing revenue base should allow Groupon to increase profit margins over time.
Total sales during the last quarter increased 20%, to $925.4 million. Excluding the $32.5 million unfavorable impact from currency fluctuation, revenue growth was 25%. On a currency-neutral basis, North America revenue increased 24%, EMEA grew 18%, and Rest of World increased 50%.
Gross billings, which reflect the total dollar value of customer purchases, increased 31% globally, to $2.1 billion in the fourth quarter 2014. On a constant-currency basis, the year-over-year increase in gross billings was an even stronger 36%.
Global units, meaning vouchers and products sold before cancellations and refunds, exceeded 100 million for the first quarter ever, increasing 81% year over year, to 101 million in the fourth quarter 2014. Active customers, defined as customers who have purchased a voucher or product within the last 12 months, grew 23%, to 53.9 million as of December 31, 2014. Almost 110 million people have now downloaded Groupon mobile apps around the world.
Management expects adjusted EBITDA to increase by 25% or more during the full year 2015. This guidance is most probably assuming that the worst is already in the past when it comes to margins. It would not be a big surprise to see profitability stabilizing and then improving over the middle term.
Importantly, Groupon is priced at a big discount versus other players in the e-commerce business. The company trades at a price-to-sales ratio of 1.5, versus price-to-sales ratios of almost 2 for Amazon, 3.6 for RetailMeNot, and 3.9 for eBay.
Amazon, eBay, and RetailMeNot are better-established companies offering more visibility than Groupon, so they clearly deserve a higher valuation. However, the fact remains that Groupon can deliver big gains from current levels if management continues leading the company in the right direction.
Transformations are seldom easy, especially in such a dynamic and competitive industry. However, Groupon stock is priced for big gains if the company keeps gaining traction among customers and producing improving profit margins over time.