EUR 850.00 For Business Accounts Only

Morningstar | Groupon Reported Mixed 3Q Results; Maintaining $4.60 FVE; Shares Are now Undervalued

Groupon reported mixed third-quarter results as the company missed our internal estimate and consensus on revenue, while it beat on the bottom line. The firm’s restructuring which includes less focus on the traditional voucher business is progressing a bit more slowly than expected. Decline in revenue from less vouchers was only partially offset by the faster growing card-linked offers made available through Groupon+ and online bookings of local events and services. Continuing cost control, mainly on marketing, again helped the firm post a profitable quarter with higher operating margin. However, we note that without a network effect economic moat source, Groupon will need to more aggressively invest in acquiring users and sign new merchants to possibly return to revenue growth in 2019 and accelerate growth through 2022. In our view, the higher marketing costs likely will limit Groupon’s margin expansion during the next five years. We did not make significant changes to our model as management maintained its full-year adjusted EBITDA guidance. We are maintaining our $4.60 per share fair value estimate on Groupon. The stock is now trading in 4-star territory as it declined more than 10% after the release of mixed third-quarter results, creating an attractive entry point for this no-moat and very high uncertainty name.

Total gross billings of $1.22 billion were down 9% from last year as decline in goods gross billings more than offset Groupon’s growth in local gross billings. Take rate of the gross billings improved by 140 basis points year over year to 48.7%, which also helped limit decline in net revenue, which came in at $592.9 million, down 7% from last year. However, benefits from the higher take rate were minimal as improvement in take rate was more than offset by a 0.6% decline in Groupon’s customer count from last year. The firm’s number of customers also declined 1% sequentially. As we have pointed to before, whether it’s decline in the customer count or lower take rate, we consider both as indicative of the business lacking a network effect moat source.

We were impressed with continuing growth in Groupon’s gross profit generated per customer, which was up 5% year over year and 0.5% sequentially. It appears that more Groupon users continue to display higher demand for high-margin products. In addition, we estimate that the acquisition cost of customers continues to decline for Groupon. However, we think the decline is mainly due to some marketing cost control which the firm has had in place the last three quarters. As a reminder, Groupon’s customer count ended third quarter with a net decline sequentially and year over year.

Lower spending on marketing and SG&A more than offset impact of revenue decline and create operating leverage for the firm, as Groupon’s third-quarter operating margin went up more than eight percentage points from last year to 9%. While we continue to model further margin expansion during the next five years, we think such expansion is limited due to the firm’s lack of network effect and other economic moat sources.

We have modeled in a 2% five-year net revenue CAGR for Groupon through 2022 as top-line growth is expected to return next year. On the bottom line, we are assuming continuing margin expansion through 2022 to 6% from 1% in 2017.