When investors think of e-commerce growth and the upcoming holiday season, most immediately think of Amazon.com (AMZN +0.55%). While Amazon.com deserves to be first on investors' (and consumers') minds this holiday season as a result of its ongoing quest to take over the world of retail, the company is not the fastest growing play on the converging trends of e-commerce, mobile shopping, and bargain hunting. At the intersection of these trends is rapidly growing digital coupon aggregator RetailMeNot (SALE +0.00%). As further detailed in a previous article detailing the investment thesis for RetailMeNot, the company has a unique business model that provides high margins and plenty of room for growth.
Huge growth opportunity
This holiday season, analysts expect RetailMeNot to increase revenue over 35% over the previous year. This growth trumps Amazon.com's expected growth rate of 22% due to the small size of RetailMeNot and the nature of RetailMeNot's business model. In the company's most recent quarterly earnings release, RetailMeNot generated 39% revenue growth (35% organic revenue growth) as a result of remarkable performance across a number of metrics, including the following:
- 19% year over year increase in traffic, to over 132 million visitors during Q3 2013.
- 17% year over year increase in revenue per visit, to $0.36 in Q3 2013.
- 81% year over year increase in mobile visits, to 35.7 million in Q3 2013.
- 190% year over year increase in mobile revenue, to $5.8 million in Q3 2013.
- 56% year over year increase in international revenues, to $9.5 million in Q3 2013.
Growth translates to the bottom line
Many investors have dismissed RetailMeNot on the basis that the company is "the next Groupon" and nothing more than a slightly different take on the daily deals site operated by Groupon (GRPN +15.01%). Unlike Groupon, whose deals typically require an upfront purchase by the consumer and then savings at a later date when the deal is redeemed (if redeemed prior to the deal's expiration), RetailMeNot creates a win-win connection between businesses and consumers that is success driven. Basically, RetailMeNot puts retailers seeking to promote sales and promotions in connection with consumers looking to save money, at no cost to the consumer.
The attractiveness to the consumer of not having any upfront investment can not be emphasized enough; as a result of the success-driven nature of the revenue model, RetailMeNot succeeds only when both the retailer and consumer are happy. The power of this model is illustrated by its profitability; unlike Groupon, which has struggled to remain consistently profitable, RetailMeNot is trading at more reasonable trailing and forward earnings multiples as noted below:
| SALE | GRPN | AMZN | |
|---|---|---|---|
| CAPS rating (out of five stars) | 3 stars | 1 star | 2 stars |
| Share price | $31.75 | $10.28 | $349.53 |
| Market capitalization (in billions) | $1.6 | $6.9 | $160.0 |
| TTM price to earnings ratio | 58.0 | N/A | 1,266.4 |
| Forward price to earnings ratio | 31.4 | 41.1 | 130.9 |
Source: Yahoo! Finance-November 12, 2013
RetailMeNot has remained solidly profitable in recent years, which is particularly impressive given the tremendous expenditures associated with the company's growth initiatives, the IPO process, and a series of acquisitions. While a forward price to earnings ratio of 31 may not appear cheap, it is a reasonable price to pay for RetailMeNot's expected growth over the next five years.
Yet another growth driver
RetailMeNot has already established a history of exceeding analyst expectations during its first two quarters as a public company. In addition to making prudent investments to take advantage of significant consumer trends and initial success with in-store promotion of retail partners, the possibility of ongoing growth through acquisition should not be discounted. The digital coupon market remains fragmented, and the traditional paper coupon market is primed for disruption thanks to the rapid adoption of smartphones.
With over $93 million in net cash and a demonstrated ability to integrate digital coupon services effectively, there is little reason to doubt the company's ability to make accretive acquisitions in the future. These deals may provide RetailMeNot with new and improved functionality, as is the case with the recent acquisition of Zing Deals and its proprietary coupon validation technology, or additional scale from the acquisition of smaller rivals.
When the potential for industry consolidation is combined with the current trajectory of RetailMeNot's existing operations, there is a sufficiently compelling investment thesis for investors to be confident that RetailMeNot will outperform the market for the foreseeable future. Foolish investors should always do their own research before making investment decisions.
