Is it finally time to buy this 'perfect' business?

Many investors have soured on this young company, but big-money players love it. Here's why you should, too.

By StreetAuthority Jun 27, 2013 3:27PM
Credit card Computer (copyright Stockbyte/SuperStock)By David Goodboy

Take a moment to try to imagine the perfect business.

It wouldn't have any of the worries or costs associated with inventory. The business would be able to profit from any product or service in the world without actually having to spend the time and money required to operate the particular business. This business would create incredible value for consumers by providing the lowest prices available for whatever happens to strike a consumer's fancy.

In addition, it would create a win-win situation for other businesses by guiding a stream of customers to their front door. Its products and services would have close to zero cost, creating nearly pure profit from each sale. Finally, the company would use the Internet to reach a worldwide client base at minimal expense.

There is no need to imagine this perfect business. It actually exists.

This theoretically perfect company is the much-maligned Groupon (GRPN).
 
Launching as the one of the most hyped IPOs in history, this daily-deals site has done nothing but smash the dreams of investors from its first days as a public company. Despite exponential growth from 400 clients in 2008 to a present 150 million, the company is down nearly 80% from its highs. Groupon is trading at around 27 times next year's estimated earnings.

My purpose is not to rehash what happened or provide "woulda, shoulda, coulda" hindsight analysis of Groupon's missteps. I'll leave that to the pundits and armchair quarterbacks. Rather, I want to build a case that Groupon is a potentially profitable long-term investment.

Groupon has a market cap of over $5 billion, revenue of more than $2 billion with year-over-year quarterly revenue growth of 7.5%. I am fond of following the big-money players, and Groupon does not disappoint with institutional interest. Thirty-six percent of the company is held by insiders, and nearly 64% remains institutionally held. Venture capital firm New Enterprise Associates maintains more than 87 million shares; Tiger Global Management holds another 65 million.

In fact, over the past quarter, JANA Partners, Slate Path Capital, Miura Global Management and Capital Tactics Advisors have all increased their holdings in Groupon.

Here are three additional reasons I am bullish on Groupon.

1. Deutsche Bank upgrade
An analyst at Deutsche Bank (DB) just upgraded shares of the company from "hold" to "buy" and increased the price target to $10. In addition, the analyst expects Groupon's billings to grow by 20% this quarter.

2. Improved marketing strategies
Two types of direct marketing include pull marketing and push marketing. Groupon was focused primarily on push marketing. This is when the company sends out emails with the goal of reaching consumers who might be interested in its partners' products or services.

Pull marketing, on the other hand, is the goal of attracting customers to the Groupon site to search for a variety of local deals. In its most recent quarter, 45% of the company's North American business came from smartphone and tablet users, and its mobile apps were downloaded more than 7 million times. While sophisticated spam filters may block push email marketing attempts for many users, pull marketing through the website and mobile apps avoids this issue.

In addition, consumers are more likely to purchase several Groupon deals when browsing the website or app rather than just the one featured in the email blast.

3. Share momentum
Groupon's stock has been in an uptrend since November: The price is up more than 100% from its sub-$3 November lows. It has broken above both the 50- and 200-day simple moving average resistance levels. The uptrend, now eight months old, shows no technical signs of ending.


Risks to consider:
Groupon faces several factors acting as headwinds. The first is consumer "deal fatigue," which means customers aren't loyal to Groupon and will switch to another deal provider at the drop of a hat. Secondly, deep-pocketed competition springing up from companies like Google (GOOG) is certain to draw customers away from Groupon. Last, many businesses have discovered that more than a few Groupon clients are purely deal-driven and will not return to purchase items at regular prices, resulting in non-repeat business for Groupon.

Action to take:
I like Groupon on a breakout close above $8. If the uptrend continues, then shares could rise to $15 within the next 12 months.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.


More from StreetAuthority:
2Comments
Jun 28, 2013 7:20AM
avatar
I just don't understand why it's working - and I've bought stuff there in the past.  I seems to me people use it then grow tired of it.  It was a fad when it came out to check it every day.  Now I don't bother because I don't want a manicure, massage, etc. and restaurant coupons can be found everyday at restaurant.com. - not coupons that must be used by a certain date.

It may do well, but I don't see how it's going to continue to increase the number of people who use the site.

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125
125 rated 1
267
267 rated 2
455
455 rated 3
612
612 rated 4
682
682 rated 5
695
695 rated 6
632
632 rated 7
472
472 rated 8
279
279 rated 9
147
147 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
VZVERIZON COMMUNICATIONS9
TAT&T Inc9
CTLCENTURYLINK Inc8
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.