When Groupon (GRPN) reported its third-quarter results last night, GRPN stock went wild. The stock jumped 11% before dropping 12%, then turned on a dime this morning and is up more than 7% from yesterday’s close.
The GRPN earnings report was certainly a mixed bag. Revenues increased from $568.6 million to $595.1 million, but still fell short of the analysts’ consensus estimate of $615.7 million. At the same time, GRPN earnings per share came in at an adjusted profit of 2 cents per share, which beat the Street forecast of 1 cent per share.
But investors were most encouraged by GRPN’s performance in North America, which saw a nice 24% gain in revenues.
So is it time to buy Groupon stock? Or should investors still wait for the company to continue with its turnaround efforts? To see, let’s consider the pros and cons:
Mobile: GRPN is nicely positioned to benefit from this megatrend, because the company has leveraged its local ecommerce platform. It has the advantages of a massive sales force, a massive user base and growing database of deals. As of now, GRPN says it is the largest mobile ecommerce player in the U.S. In the latest quarter, the company hit a record number of downloads, totaling more than 9 million. In all, the company has hit 60 million downloads, and about half of all transactions in North America come from mobile devices.
Asia: In Q3, GRPN pulled off a savvy deal, acquiring Ticket Monster. The company is a top provider of local commerce in Korea, and has more than 4 million active users in Korea’s thriving mobile market. The acquisition should provide GRPN with valuable best-practices for using search-based local commerce strategies. But the company should also be a strong launchpad into the rest of Asia, which could provide serious long-term growth potential.
Valuation: GRPN stock is trading at a reasonable multiple, at about 2.6 times sales (for the past 12 months). This is certainly much more attractive that other social/mobile players like LinkedIn (LNKD), which is at 18X and Facebook’s (FB) 16X.
Mobile Uptake: Unfortunately, downloads don’t always lead to purchases. Compared to other users, app-only users take 30% longer to make their first purchase. GRPN is still learning how to improve the overall experience, as it’s doing with push notifications. But consumers have plenty of other options to choose from, like apps from eBay (EBAY) and Amazon.com (AMZN). To help improve the performance, GRPN recently added some important features to its app, like location-based search results.
Google: Google (GOOG) has poured resources in building a local ecommerce platform. And the tech has some major advantages over GRPN. For example, the company recently added promotional deals to its Gmail service. It looks like GOOG is putting some pressure GRPN, and things could get even worse. Google only needs to leverage its search engine and its huge Android footprint to really hurt GRPN.
Restructuring: GRPN still has much work to do to improve its platform — especially in foreign markets, where revenues plunged by 21% last quarter. To get things back on track, GRPN has been centralizing its infrastructure and moving away from its daily-deals approach. Now the company is focused more on being a search engine for local deals. Whenever a company makes a transformative change with its business model, the process can be rocky — and the result coulds prove dissapointing.
Not long ago, it looked like Groupon stock was headed for oblivion. But in short order, CEO Eric Lefkofsky has made tremendous progress. He has stabilized the losses and refocused the core business. He wants to make GRPN into the place for people to check before going out to eat, booking a reservation for a trip, trying a new local spa or buying a new products.
The good news is that GRPN has invested heavily in its mobile platform. While there are about 1 billion smartphones in the world now, that number is expected to jump to 5 billion in the next five years. That kind of tidal wave that should drive Groupon earnings well into the future.
So should you buy Groupon stock? Yes — if you’re looking to play the mobile revolution at a fair valuation, the pros certainly outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.