Is Groupon a Value Investment Relative to its Peers?

Groupon reported earnings on Thursday, Nov. 7 and saw quite a bit of volatility, to say the least. After reporting earnings, the stock fell double-digits, but then recovered to post gains of nearly 10%. While there are no direct comparisons to Groupon, companies such as Amazon or Expedia might provide an indication of whether or not Groupon is a good investment.

How do these companies compare?
Groupon is clearly an Internet-based company, but does not operate in a home space such as travel, e-commerce, or social media. Quite frankly, Groupon is a little bit of everything -- it offers travel deals similar to Expedia, but also goods like Amazon.

Therefore, while keeping these comparisons in mind, we can better assess Groupon as an investment, and the performance of its third quarter.

The ups and downs of Groupon
Since Groupon's IPO in November 2011, shares have fallen more than 60%. The company's trademark Daily Deals was losing momentum, so Groupon shifted its business plan to offer deals for longer periods of time in an online search format (e-commerce). This strategy has sparked growth, but was offset by the continued decline of Daily Deals.

Despite lost revenue from "old Groupon" and growth in "new Groupon," shares have rallied 165% over the last year, as investors believe the company's new approach will provide long-term growth. Therefore, in its most recent quarter, investors ignored the company's 5% total revenue growth in place of its 38% growth in e-commerce.

The problem is that the declining deal-focused revenue (7% decline in the third quarter) is still more than 65% of Groupon's total sales. However, investors are betting big on e-commerce, hoping it can produce many years of double-digit growth.

The fact remains
While Groupon may eventually reach a point where it is strictly an e-commerce company with solid growth, offering food, goods, and travel deals, the fact remains that, right now, Groupon has growth of 5% year-over-year. Also, it has very low operating margins of just 2.6%.

Many investors give Groupon a pass because, compared to the likes of Facebook and LinkedIn, it is very cheap, trading at just 2.6 times sales. However, Groupon is not like either of the noted social media companies, but rather more like Expedia or Amazon.

How does Groupon compare?
Expedia sells online travel deals, as does Groupon. However, in Expedia's last quarter, it grew revenue by 20% year-over-year. Also, Expedia saw an acceleration of growth, as revenue increased 16% in the second quarter. In regard to Groupon, its 38% growth in e-commerce was a major deceleration compared to its prior quarter, where the segment grew 190%. Additionally, with operating margins of 9%, Expedia is much more stable, and at 1.75 times sales, it is cheaper and growing faster.

You won't hear many people saying that Amazon is cheap, unlike Groupon, as the e-commerce giant trades at a whopping 130 times next year's earnings. However, as valuations for Internet companies have proven time after time, earnings are almost irrelevant and valuation is tied to the revenue growth.

Amazon, with 24% growth and $70 billion in annual sales, trades at 2.24 times sales. When you compare Amazon's premium to Wal-Mart's 0.5 times sales, clearly Amazon looks pricey. However, when compared to Groupon, a company growing much slower, Amazon actually looks cheap. After all, companies with greater growth are awarded greater multiples, and Amazon is growing significantly faster than Groupon and Wal-Mart.

Final thoughts
The bottom line is that Groupon is neither cheap, nor growing at a level to support significantly higher prices. Groupon's new e-commerce transition is working, and personally, I love the deals that Groupon offers. However, with just $200 million in quarterly sales from this division, and slowed growth, there is no proof that Groupon's e-commerce business will ever grow to support its near $7 billion valuation. With that said, $10-$11 seems to be a fair price, but not nearly as attractive as Expedia or Amazon at their current prices.

Winning the retail stock war
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

The article Is Groupon a Value Investment Relative to its Peers? originally appeared on

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story