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Groupon Is Making Good Moves, But Is it a Worthy Investment?

August 19, 2014 | About:
kcpl

kcpl

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The online deals company, Groupon (GRPN), released disappointing results for the second quarter. The company was already drowning, but the recent results have added to its woes. The widened loss clearly indicates Groupon’s declining financial position. This continuous decline has scared investors away, and the stock crashed. Though revenue improved slightly, it wasn’t impressive enough to beat the consensus estimates.

Management says it is expecting a turnaround, but the statement doesn’t match its current financial position. The financials of the online deals company were weak. However, its revenue improved 24% as compared to the previous year. The earnings of the company, however, did meet Wall Street’s estimates. However, it failed to meet the sales estimates of $762 million. Also, its loss widened by $22.9 million.

Trying to get better

Groupon's share price indicates that the situation is grave, and it has to work on it to survive in the online deals market. The company is, however, making moves to put its business back on track. According to management, the business is in transformation mode. The company has been making investments to transform the business into an e-commerce site.

The company’s vision of transforming the business into an e-commerce unit is not easy to achieve as it can face stiff competition from market leader Amazon.com. It also faces stiff competition from other companies as well in the daily deal coupon business. Groupon is working on the weaknesses that have resulted in a decline.

The customers were disappointed by the overflowing of their inbox with too many deal offers. To rectify this weakness, Groupon has introduced inventory so customers can claim deals and purchase goods simultaneously, leveraging its vast collection of contact information to connect retailers directly with shoppers.

Good moves

Groupon is focusing on many aspects in search of profitability. It is diversifying its business to sales of physical goods and longer-lasting discounts accessed through mobile phones. Further, the company also has plans to connect with local commerce on the back of the launch of a new operating system, Gnome, providing simplified payment systems to both retailers and shopkeepers.

Moving on, Groupon is seeing positive signs from the mobile segment. This can be seen by the fact that about 92 million customers have downloaded its apps. This is a definite indication for Groupon as its transition efforts are giving some meaning to its strategies.

In addition, Groupon is also aggressive about adding more value to its portfolio. It has come up with exciting features in which the merchants will have a free will to offer deals that vary based on the time of day, as well as day of the week. This is an attractive feature for the investors as they will have more of their personal choice, and their inbox won’t be flooded with useless emails. This is a good move by Groupon as has tremendous potential to drive greater revenue.

What next?

Groupon’s main focus remains on North America, where it is taking several cost-cutting initiatives. With such moves, Groupon is aiming at improving profit margins in North America. Under this, the company has made some strategic changes, including shifting of most of its business to the drop ship platform, moving more fluently to its distribution center in Kentucky, increasing per unit order.

On the international front, Groupon is also making efforts to reduce the losses. Moreover, it is also seeing healthy growth in markets in the Asia Pacific region, which is showing robust performance and growth.

Conclusion

However, if we look at the core financials, Groupon is still struggling. Though the forward P/E of 29.77 indicates growth in earnings, but investors can consider other companies. Groupon is weak on many grounds. Its declining net income and share price are a matter of worry while an inadequate return on equity and poor cash flow makes the situation worse for Groupon. As of now, investors should stay away from Groupon until it shows some strong signs of getting better.


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