Groupon?  Earnings Blowout?  Who’d Have Thunk It?
   
Price Target $7.00

  
February 16, 2017

Last year when we learned that Alibaba (NYSE:BABA) had purchased nearly 33 million shares of Groupon (NASDAQ:GRPN), we raised an eyebrow.  What were they thinking?  At yesterday’s closing price, Alibaba is up nearly 60% on its investment in little over a year.  Nice!  Alibaba is not the only company to have had a big payday with Groupon.  FMR, LLC, which currently owns nearly 85 million shares of Groupon, similarly had a yuuuuge payday yesterday. 
What happened yesterday with this company whose stock price has been faltering for the last few months? Groupon reported fourth quarter non-GAAP earnings per share of $0.07 and revenues of $934.9 million, both blowing away analysts’ consensus estimates.  The company also reported fourth quarter adjusted EBITDA of $80.6 million, $178.1 million for the full year and positive operating cash flow of $117.1 million for the full year.  The news was so good, the stock traded about 10 times its normal daily volume yesterday and closed up over 23%.  Even after the closing bell, nearly half a million shares traded hands!

The company added 5.2 million net new customers in North America, bringing North America active customers to 31.1 million with global active customers reaching 52.7 million.  Groupon’s active customer growth sounds a bit like Netflix’s (NASDAQ:NFLX) massive subscriber growth reported last month. That’s something one doesn’t see quite often, Groupon and Netflix in the same breath, but there you have it.

For 2017, the company raised its annual forecast.  It now expects gross profit to be in the range of $1.30 billion to $1.35 billion, an increase of $40 to $90 million compared to 2016; and it expects 2017 adjusted EBITDA to be in the range of $200 million to $240 million, an increase of $16 to $56 million compared to 2016.

LivingSocial Purchase Starting To Kick In :  Remember, investors did not initially embrace the idea of Groupon’s absorption of rival LivingSocial.  In October when the deal was announced, Groupon’s shares had an intraday fall of as much 19%.  However, when a company can purchase a rival once valued at $6 billion for next to nothing (Groupon says it purchased LivingSocial for “no consideration”), that says a lot...it's the art of the deal.  The acquisition is turning out to be a good arrangement because it has expanded Groupon’s customer base, which can be seen with fourth quarter North America net customer additions of 2.0 million, with 1.0 million unique customers added from LivingSocial.  Additionally, LivingSocial contributed 4% of the 11% YOY local billings growth during the fourth quarter.

“I Love it When a Plan Comes Together”:   A little over a year ago, Groupon’s Board promoted Rich Williams to CEO from COO at a time when the company’s gross margins were spiraling down and the company’s share price had been steadily plummeting.  With plans to turn around the company’s fortunes, Mr. Williams announced a slew of bold measures such as making considerable staff cuts, significantly raising marketing investments, streamlining its international portfolio by exiting some 11 underperforming countries, and moving away from certain low-margin goods businesses. 

Mr. Williams’ efforts appear to be paying off.  In the third quarter of last year, marketing efforts helped acquire 1.2 million active customers in North America, its best performance in more than three years, while local billings also increased 10 percent year-over-year.  The benefits of these initiatives were even more impressive in this fourth quarter when active customers, sales, EBITDA, and local billings growth all improved dramatically.  According to Mr. Williams after the LivingSocial purchase, “What we are seeing there is just solid execution against our strategy.”

Consumer Are Still Spending:  Despite many brick and mortar retailers bemoaning their fate of lower foot traffic and the overhang of a “border tax”, consumer spending is steadily rising, especially in the online sphere.

Retail sales rose more than forecast in January in a broad-based advance, and consumer prices climbed by the most in almost four years, according to government figures released yesterday. Compared with a year earlier, purchases climbed by the most since March 2012.  The data, backed by a jump in consumer and business sentiment since Donald Trump’s election victory, indicates growth this quarter will get a boost from healthy household spending, which accounts for about 70 percent of the economy.  All of this is good news for Groupon, which has had a hand in training today’s consumer to get as much as you can for as little as you can.

Going Forward:  Despite challenges with international revenues and competition from other large internet and technology-based businesses such as Amazon (NASDAQ:AMZN), Groupon delivered a solid quarter and, more importantly, a solid outlook for 2017 with guidance of $200-240mn of adjusted EBITDA.  The 2017 outlook suggests continued cost discipline.  With Groupon’s 52.7 million active customers and base of local merchants, the company has a significant advantage over potential competitors in addressing the local commerce market.  And with $891 million in cash on hand with a mere $2.66 billion market cap, we see much more room to grow and consequently assign a one-year price target of $7.00.