Groupon Inc. (GRPN) will report its fourth quarter earnings as a public company for the first time on February 8 after the bell. Groupon is well positioned in the local deal space and an expanding portfolio of new initiatives to monetize its user base.
After a mixed 3Q that likely had some unusual product mix and summer seasonality effects, Groupon is expected to report some reassuring q/q trends in 4Q. For 4Q11, gross billings of $1.2 billion are expected, marking a 3.7% sequential increase, driven by ~160 million global subscribers at the end of the period, with approximately 20% active.
GRPN may or may not disclose the number of groupons sold or price per groupon. Predicting these metrics is a shot in the dark and hence primary focus will be on gross billings, as the company also manages for absolute dollars.
4Q11 EPS is expected to come in at $0.03. Expected 2012 revenue/EPS of $2.29bn/$0.37 vs. the street at $2.27bn/$0.30. Biggest potential for upside is margin expansion, with 3Q'11 margins improving 1,550bps from 2Q. Top-line growth is expected to decelerate at a slower pace than street estimates in 2012.
Third Quarter Results
Gross billings growth (formerly Groupon's "revenue") was strong, increasing 24% sequentially to reach almost $1.2 billion for the quarter. Revenue growth was also solid, albeit distinctly slower than gross billings as a result of revenue mix (Groupon has launched several new, lower-margin products that took "shelf-space" away from the higher margin core local products). Revenue grew 9% sequentially to $430 million.
Cumulative Customers also continued to grow rapidly, reaching 29.5 million, despite marketing spending dropping significantly. Free cash flow increased to $60 million for the quarter, as Groupon continued collecting cash before having to pay its merchant partners.
The company earned $0.07 a share, $0.35 a share, $0.48 a share and $0.65 a share during the third, second, first and last year's fourth quarter.
BofA Merrill Lynch initiated coverage of Groupon with a Buy rating and $28 price objective based on 35x 2013E PF EPS of $0.81.
While JP Morgan maintains a $24 price target on GRPN based on 17x 2013E EBITDA of $888M, a multiple that is in line with other high-growth Internet peers. Their DCF supports $24 PT and assumes a 13% WACC and 3% long-term growth rate.
Credit Suisse maintains a Neutral on GRPN with a price target of $25, based on DCF, using a 12% WACC and 3% terminal growth. This implies a target 2013 P/E multiple of approximately 32 for GRPN.
Based on Groupon's growth profile and near-term upside potential, if Groupon manages to execute on its margins, a $36 upside case is certain. However, in case of a failure, forward estimates and the forward P/E multiple could contract and could lead to a $11 downside case. Based on this relatively large range, Groupon is likely to have more volatility than many of its large cap. peers.
GRPN is well positioned to take share of local leisure, recreation, and food service markets, which represent an estimated $5.3 trillion in sales globally and $1.4 trillion in the US alone.
The company's new ventures like Getaways and Groupon now are expected to be crucial for future growth. While loyalty building programs like Groupon Rewards may not have a huge impact in the medium term they would be of utmost importance to the company as competitors like Google Offers expand further in 2012.
We also expect the Facebook IPO to have a material impact on GRPN's earnings going forward. Shares of GRPN added almost a percentage point on the day Facebook files for its historic IPO.