When Groupon Inc (NASDAQ: GRPN ) last reported quarterly earnings, the results were so poor that GRPN stock fell from around $5.50 to below $4 per share. Shareholders were blindsided when the company agreed to acquire LivingSocial. With LivingSocial closing quickly in the quarter, will Groupon surprise investors with that acquisition?
Groupon described LivingSocial's cost as not material, but it could still have a positive impact on the business. GRPN forecast revenue guidance for FY 2016 as high as $3.15 billion. EBITDA of $150 million to $165 million already surpassed the consensus estimates of $154 million.
Watch GRPN's Cash Flow
Groupon's third-quarter cash flow was down $53.7 million, due to restructuring and litigation costs. When the company reports fourth-quarter results on Feb. 15, seasonal strength may result in higher revenue.
Remember that this quarter will include Black Friday and Christmas. This is historically GRPN's biggest quarter of the year. The lower operating expenditures - thanks to cost cuts made last quarter - may contribute to a positive FCF.
Merchants who signed on during the holidays will add to Groupon's sales totals. Existing customers may have added more promotions. Since businesses take on risks but GRPN supplies the network of customers seeking a deal, it is a win-win for both parties.
Customers who are cash-strapped flock to businesses like Dollar General Corp. (NYSE: DG ). So long as Groupon is around to promote businesses through daily deals, its earnings potential will get stronger over time. GRPN stock trades at a price-to-sales ratio of 0.67x compared to 1x with Dollar General. Groupon clearly operates differently than companies like DG or TJX Companies Inc (NYSE: TJX ). The latter two rely on foot traffic in stores to drive sales. GRPN stock relies on merchants offering up deals and customers buying them online.
Expect Less Competition for Groupon Stock
Amazon.com, Inc.'s (NASDAQ: AMZN ) exit from the daily deals market in 2015 should lead to higher revenue and lower costs for GRPN. Taking out LivingSocial removes yet another competitor. It takes several quarters before these factors show up in Groupon's bottom line. This is already showing up in the North American business. In the third quarter, sales in this region grew 10%, the highest in six quarters :
"That's most apparent in North America where our local business grew 10% year-over-year. The highest in six quarters, helping us deliver revenue of $720 million and adjusted EBITDA of $32 million."
GRPN added a whopping 1.2 million new customers in North America, its highest in more than three years.
Part of this could be attributed to the fact that Groupon spent $88 million in online and offline marketing last quarter. Due to its scaled and accountable advertising platform, investors should anticipate customer spending growing proportionately faster than GRPN's ad spend.
Groupon said it had a cumulative 140 million downloads at the end of the third quarter. Further investments in this technology, combined with digital campaigns through Facebook Inc (NASDAQ: FB ) and Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ) will further drive traffic to GRPN.
Portfolio Allocation to GRPN Stock
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Given the speculative nature of GRPN stock, investors should not set a high allocation in it. Here is an example of a live trading account that returned 16.5% monthly.
Here are two other related trading strategies for GRPN stock:
Chances are good that the company had a solid quarter; therefore, Groupon stock could make a "boom" and reverse the downtrend on its share price.
As of this writing, Christ Lau did not hold a position in any of the aforementioned securities.
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