Why Groupon Offers Big Upside Potential

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Why Groupon Offers Big Upside Potential Source: Groupon

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Introduction Groupon is going through a deep transformation, and results have been mixed so far. While sales and operational metrics are clearly improving, profitability remains under pressure. When compared against competitors such as Amazon, eBay, and RetailMeNot, Groupon looks significantly undervalued. If Groupon can prove to investors that it’s on its way to a successful transformation, the stock offers considerable room for gains from current levels.

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The New Groupon Groupon wants to become a full digital marketplace that can be accessed anywhere, anytime, not just a daily-deals site. Management wants customers to go to Groupon searching for opportunities -- the "pull" business model -- as opposed to the "push" approach of sending daily deals via email. Mobile integration and an increased focus on local deals to boost relevance and effectiveness. Groupon is expanding into e-commerce and diversifying via acquisitions, such as South Korean e-commerce marketplace Ticket Monster and U.S. fashion site Ideeli.

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Positive Customer Response Data Source: Groupon

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Strong Revenue Growth Source: Groupon

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Falling Profit Margins

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Investors Seem Very Disappointed With Groupon

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Price to Sales: Groupon vs. Amazon, eBay, and RetailMeNot Data Source: FinViz

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The Problem Amazon is the leading online retailer, with spectacular growth rates and razor-thin profit margins. eBay has a solid position in e-commerce and digital payments, and the company is more profitable than Amazon, even if it’s not growing as fast. RetailMeNot is growing at full speed while generating impressive margins in the discounts industry. What's Groupon place in the industry? What kind of financial performance will the company generate?

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The Plan “For 2014, we have three primary objectives. First is to reaccelerate our local growth in North America and abroad. Second is to improve the gross margins and operating efficiency of our Goods business. And third is to continue to achieve stability in our international operations and reduce our losses in Rest of World so that every region in which we operate is generating positive segment operating income by year end, excluding any impact from acquisitions. We believe we are on course to achieve all three objectives by the end of 2014 and have raised our full-year guidance accordingly.” --Eric P. Lefkofsky, CEO .

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Profitability Drivers Growing sales should naturally increase margins, as the company spreads fixed costs on a growing revenue base. Groupon plans to significantly reduce expenses in shipping and fulfillment, which management considers “the main culprit that drags down our gross margin in North America.” Rolling out in the rest of the world tools and technologies that have produced solid results in North America.

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Key Factors to Watch Can Groupon consolidate its position in the industry while facing tough competition from Amazon, eBay, and RetailMeNot, among others? Will the company be able to increase profit margins while sustaining sales growth? Can management deliver according to plan?

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Foolish Takeaway Groupon’s transformation is generating healthy results when it comes to sales and customer response, but profitability is quite scarce. Investors seem disappointed with Groupon, and the stock is attractively valued in comparison to competitors such as Amazon, eBay, and RetailMeNot. If Groupon can dissipate investors’ concerns regarding its business model and profit margins, the company offers substantial upside potential from current levels.

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