3 Groupon Growth Seeds the Market Is Missing

Billy Duberstein, The Motley Fool

Updated Wed, Feb 21, 2018, 5:52 PM

Groupon (NASDAQ: GRPN) recently reported profit of $0.07 per share, falling short of analyst expectations of $0.09. However, the subsequent sell-off was more likely caused by management's underwhelming 2018 guidance of 4% to 8% adjusted EBITDA growth, along with relatively flat income from operations of $25 million to $35 million.

Still, I'm going to make a contrarian call here and say the market is being overly harsh, giving the company zero credit for several promising new initiatives that could make a longer-term difference for Groupon's prospects. Here are three potential growth drivers the market is missing.

Groupon logo on nine linked TV screens hanging next to front office desk.

Image source: Groupon.

Groupon+ and more

Last year, the company introduced a reinvention of its core product. Groupon+ allows customers to link Groupon deals directly to their credit card, which relieves two big pain points in using Groupon: 1) pre-paying, and 2) looking cheap by having to hand over a coupon.

In the fourth quarter, Groupon reached a deal with American Express -- the last major credit card company to come on board -- after Mastercard joined the program in the third quarter. Visa became a partner earlier in 2017.

In addition, Groupon+ was able to boast of a few more achievements:

Groupon+ is now in more than 25 markets, including the biggest U.S. cities.
2.7 million cards are now linked to Groupon+, out of 49.5 million active Groupon customers.
Management claims that when customers begin using Groupon+, their purchase frequency goes up to about twice that of traditional vouchers.
Management says the company has doubled merchant sign-ups and card-linking every quarter since Groupon+ was unveiled in early 2017.
Merchants are positive on Groupon+ flexibility, with a significant number using Groupon+ to provide customers with an ongoing loyalty-like program.
Not only are small businesses signing up for Groupon+, but national brands such as Starbucks (NASDAQ: SBUX) are using Groupon+. https://seekingalpha.com/article/4146797-groupon-grpn-q4-2017-results-earnings-call-transcript?part=single

Despite these positives, Groupon+ adoption will hurt near-term billings and revenue, and that may have played into the lackluster 2018 guidance. That's because Groupon recognizes billings and revenue when a Groupon+ offer is used, not when it's first purchased, as is the case with vouchers.

On that front, management noted that while fourth-quarter billings were up only 3%, when factoring in Groupon+ and the partial sale of Groupon's OrderUp subsidiary, billings would have been in the high single digits.

International

Another potential growth driver for Groupon is its international markets. Over the past two years, the company strategically exited all Asian and Latin American markets, reducing the countries in which it operates from 47 to 15. The exits were just completed in early 2017, which led to a 1.4% decline in international billings. however, international revenue rose 8.3%, with international gross profit up an even higher 12.1% as the company focused only on its more profitable geographies.

In 2018, management will be stepping up marketing in Europe, which may hurt 2018 margin but could lead to much bigger growth beyond next year. International gross profit is only about half of North American gross profit today, but the total addressable market is twice as big.

Partnerships

While Groupon has largely been a closed-off service for most of its lifetime, management made a decision to open up its platform during 2017, noting on the recent conference call that it signed around 10 new partnerships.

Most significant is the new partnership with Grubhub, which will enable customers to order from local restaurants directly through Grubhub by way of the Groupon platform. As part of the deal, Grubhub paid Groupon $17.1 million for customer lists from Groupon's OrderUp subsidiary in 27 markets. Grubhub will essentially replace OrderUp, though OrderUp will continue operations in 11 smaller markets.

While the deal closed last July, the full integration will roll out in the first quarter of 2018, so investors can expect any benefits of this and other partnerships to affect Groupon's results over the latter part of 2018 and beyond.

Against the grain

Many investors have written Groupon off, but new CEO Rich Williams has engineered an impressive turnaround in profitability over the past two years. Now that the cost-cutting is over, investors should monitor these three new initiatives -- if they end up producing sustainable growth, Groupon's stock may end up looking like the very bargains it peddles on its site.

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Billy Duberstein owns shares of Groupon and Starbucks. The Motley Fool owns shares of and recommends Mastercard, Starbucks, and Visa. The Motley Fool recommends American Express and Grubhub. The Motley Fool has a disclosure policy.

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