Groupon: This Leader Lacks Robust Profitability
We are initiating coverage of Groupon (GRPN) with a no-moat rating and a fair value estimate of $4. As a first mover in the local market daily deals space, Groupon has captured a leadership position but robust profitability has not followed. While there have been some indications of improvements, thanks to a restructuring plan that is in place, we are skeptical about the company's ability to accelerate top-line growth and expand margins over the long run. We do not expect Groupon to generate excess return on capital consistently and, in turn, generate an economic moat, in light of the size-limited and high-touch local markets that it targets, which is why we view it as a no-moat company. Based on our fair value estimate, we believe Groupon is currently overvalued and recommend investors avoid this name for now.
Groupon's business is split about evenly across two different revenue streams. First, Groupon provides daily deals (in the form of online vouchers) from local merchants to consumers. Groupon's online discounts cover a variety of services including restaurants, health, beauty and fitness, and home and garden. Groupon's average take rate on the purchase and/or usage of the vouchers is between 30% and 35%. Second, customers can also shop for different products on Groupon (such as toys, apparel, etc.) where the company would be the direct merchant. Gross margin on these direct sales are typically 12%-15%.
Unfortunately, we don't see Groupon benefitting from switching costs from either its merchant partners or the company's customers. Customers are able to make one-time voucher purchases without guaranteeing repeat business with neither the merchant nor Groupon in general. This dynamic has led to lackluster revenue growth and consistently high customer acquisition costs that pressure margins.
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