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The Great Groupon Pile On


Growing revenues is great but at some point a company has to prove that it can make money.


Groupon (GRPN) went from nothing to a $13 billion valuation, rejecting a $6 billion buyout offer from Google (GOOG), going public within three years, and sparking an epic gold rush in the daily deal space. Almost overnight, more than 900 clone sites launched around the world, serving virtually every imaginable niche and local market.

Dealing In

Groupon appears to be rebounding from its post-IPO days as Wall Street's whipping boy after its stock plummeted to $10, half of its IPO price. Quarterly earnings beat consensus as the company reported revenues of $559 million, 4% above analyst estimates of $530 million. Earnings per share came in at $.02, double analyst forecasts. In more good news for Groupon, it was reported that mobile accounted for 50% of transactions, a positive development as the world shifts increasingly to mobile, especially in emerging markets.

As of Q1 2012 Groupon's international business accounted for 67% of revenues. International operating margins are 9% compared to 16% in the US, but the company expects this to even out within two years due to the growing user base as markets mature, offsetting customer acquisition costs.

Go East, Mason

Groupon took an early interest in Asia, attracted by expanding economies, explosive internet growth rates, and a cultural bias toward community buying and bargaining.

Groupon opened in China in February 2011 in a joint venture with Tencent (TCEHY), a major holding of the Global X NASDAQ China Technology ETF (QQQC), China's largest internet provider. It's seeking a piece of the world's largest Internet market in excess of 480 million users, joining more than 2,000 other daily deal sites already vying for a slice of the pie. Daily deals in China generated $119 million in June alone, more than double the January numbers.

Groupon now operates in five major Southeast Asia markets, including Malaysia, Indonesia, Thailand, Singapore, and Philippines. Thailand's daily deals space is dominated by Ensogo but Damian Kemner, CEO of Groupon Thailand is upbeat on the company's prospects, saying "we are very excited to expand the benefits of Groupon to customers and merchants in Thailand."

Although relatively small, Singapore is a wealthy market with a healthy appetite for shopping and Groupon's commission-based model. There have been rumors that Groupon is looking to move into Vietnam, where local operator is currently the dominant player. Due to the lack of credit card penetration and the fact that online buying is still a foreign concept, NhomMua must send motorcycle messengers to deliver each voucher and collect payment. But with a population of 90 million, a rapidly-growing middle class and astronomical internet growth, this is market that is sure to become a daily deals battleground.

The State Bank of Vietnam (or SBV) in 2012 will complete the legal framework as part of a plan to begin phasing in greater use of credit cards and electronic payment. The number of credit cards in use in Vietnam has increased twelve-fold since 2006, with more than 44 million.

Groupon stock fell sharply on June 1 in heavy trading as the shareholder lockout period ended, but some analysts indicate that Groupon stock should start to fare better in Q4 in light of evidence that the company is making moves toward becoming a direct e-commerce company. Analysts forecast Groupon to grow earnings at an average annual rate of 31% over the next five years, with this year increasing 100.24% over 2011.

Dollars for $0.90

Growing revenues is great but at some point a company has to prove that it can make money with their product, not just be a service provider. The market is losing patience with social media companies who cannot operate on a trajectory towards profitability and Groupon is one of them. Facebook (FB) is facing the same dilemma and will get at most two quarters to produce a credible path to monetization. Groupon's profit trajectory was intact until Q4 2011 when it hit a wall.

There is a lot of downside risk as Groupon's stock is consolidating between $8.80 and $12.00 per share. For those willing to take a chance, selling puts well below the May low may provide a manageable way to get paid to wait and see what happens.

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