Groupon Shareholders Caught in the Middle of Conflicting Data
It was a little over a week ago Groupon (NAS: GRPN) began its impressive, albeit short, jump in share price. On Sept. 5, Groupon ended the day's trading at $4.18 a share. The next day, Groupon stock began its steady rise to its Sept. 14 price of $5.27, a 26% bump. Then the bottom fell out on Sept. 17.
So what happened? Merchant demand -- or the lack thereof -- is what happened. At least, that was the information skittish Groupon shareholders elected to focus on. Raymond James analysts released the findings of an in-house survey that painted a less-than-glowing picture. The gist of the survey raised concerns about the "stickiness" of existing Groupon customers, and the prospects for future growth in a market that is "near saturation." But the results of another study on the online deals marketplace -- also released Sept. 17 -- suggests the opposite.
The study of the first part
Of the 100 (give or take) existing Groupon merchant customers contacted by Raymond James, a mere 37% were either satisfied or very satisfied with their partnership. Of the remaining survey participants, a full 39% of respondents replied they were unlikely to run a Groupon online coupon deal over the next couple of years. Hence the "market saturation" and "stickiness" concerns, not to mention the subsequent drop in Groupon share price.
There are a couple things worth noting here. No. 1, Groupon ended Q2 2012 with a touch over 38 million active customers. As per Groupon's earnings announcement, an active customer is one that has a "unique account" and has purchased a Groupon during the past 12 months. In other words, a legit measurement. So who are these 100 customers, and even more worrisome, why are they used as the spokespeople for Groupon's entire customer base?
No. 2, the nano-like percentage Raymond James used of Groupon customers for its study is not -- if I remember my statistics class correctly -- a "representative sample." Unfortunately, coming on the heels of a 26% stock price run-up, Groupon shareholders were awfully quick to pull the trigger at even a hint of bad news. Apparently, negative feedback from 100 out of 38 million was all the bears needed.
That "other" study
Lost in the noise created by Raymond James was the release of another study on Sept. 17: This one conducted by market research firm BIA/Kelsey. To be fair, BIA/Kelsey doesn't disclose (I'd have to pay for that info) the number of participants, but I'd hazard a guess it's more than a hundred. Anyway, the results of BIA/Kelsey's survey of small-business owners across the U.S. came to a different conclusion about the state of the U.S. online deals marketplace.
According to BIA/Kelsey, consumers' online deals spending will reach approximately $3.6 billion by the end of 2012, a nearly 87% increase from last year. Then, online deals will generate another 23% in consumer spending on top of that for 2013, rising to an estimated $5.5 billion by 2016. That doesn't sound like a market "near saturation." Not to mention, the study only takes into account U.S. consumers. As Groupon's results confirm, international expansion is a focus of management, and it's working.
So, if I understand Raymond James correctly, Amazon's investment in LivingSocial, Google's rollout of its online deals service Google Offers, and Facebook's (NAS: FB) Deals were poorly timed mistakes. No, there's a reason all these big hitters are in the online deals space; they know an opportunity when they see one.
A primary reason for Groupon's run-up last week was the announcement that its SmartDeals technology is (finally) heading to Europe. The growth in North America last quarter -- a 66% jump in revenue vs. Q2 of 2011 -- was largely due to results from customers implementing the SmartDeals marketing tool. As for Europe, CFO Jason Child said, "[SmartDeals is] one of the primary drivers we expect to see in the back half of this year."
Bottom line: Study results conducted by a market research firm should carry more weight than a sample consisting of 100 people out of 38 million. But as the reaction to the studies of Sept. 17 demonstrates, when it comes to Groupon, bad news is going to drive the short-term stock price -- no matter the source. But if you have the time to ride out Groupon's inevitable swings in stock price, nothing's really changed since last week.
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