Can Santa Claus Save RetailMeNot?

by Tom Taulli | December 3, 2013 1:43 pm

Since the company’s IPO in mid-July, shares of RetailMeNot (SALE[1]) have posted a nice gain of 45%. Yet during the past couple months, the stock has come under pressure, falling about 28%. While it’s normal for a recent offering to see lots of volatility, there may be some legitimate worries about the company’s prospects.

The irony is that SALE should be a huge beneficiary of the upcoming Christmas season. The company operates a leading marketplace for digital coupons. So, with shoppers looking for a deep discounts during the holiday, RetailMeNot is positioned nicely. The company has partnerships with major retailers like Home Depot (HD[2]), Macy’s (M[3]) and Kohl’s (KSS[4]).

And growth has been strong. In the latest quarter, net revenues jumped by 39% to $34.2 million, and mobile revenues soared by 190% to $5.8 million. Its apps have been downloaded a total of 8.8 million times. The company even posted net income of $5.6 million and adjusted EBITDA of $16.4 million, thanks to juicy margins.

So what’s the problem with the stock? For the most part, SALE is facing more competition. For example, Groupon (GRPN[5]) recently jumped into the market with a program called Freebies.  No doubt, GRPN has some big-time advantages, such as a well-known brand (especially for discounts) as well as a massive mobile footprint. In fact, in the latest earnings call, GRPN claimed it is the largest mobile ecommerce player in North America[6].

LivingSocial has also entered the market. While the company has struggled, it is trying to find ways to move away from the daily-deals business. Thus, by offering digital coupons, the company could have an opportunity to find high-margin revenue opportunities.

Then there’s Google (GOOG[7]). During the summer, GOOG introduced promotions though its Gmail service, which has more than 400 million users. It’s still in the early stages but Google is certainly trying to find ways to get a piece of the massive ecommerce pie. Keep in mind that, during its latest earnings call, Groupon noted that Google’s efforts have had an adverse impact on its results[8].

But Google isn’t the only tech biggie that is moving into digital coupons. Apple (AAPL[9]) has its Passbook service and eBay’s (EBAY[10]) PayPal has an offering as well.

It’s far from clear what the impact on SALE will be. But the fact is that the digital coupons market has minimal barriers to entry. And more importantly, SALE’s competitors have tremendous resources as well as control of important platforms, such as iOS and Android. So while the company may still see strong growth in Q4, it’s reasonable to expect it to come under some pressure, and soon.

Tom Taulli runs the InvestorPlace blog IPO Playbook[11]. He is also the author of High-Profit IPO Strategies[12]All About Commodities[13] and All About Short Selling[14]. Follow him on Twitter at @ttaulli[15]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. SALE:
  2. HD:
  3. M:
  4. KSS:
  5. GRPN:
  6. largest mobile ecommerce player in North America:
  7. GOOG:
  8. adverse impact on its results:
  9. AAPL:
  10. EBAY:
  11. IPO Playbook:
  12. High-Profit IPO Strategies:
  13. All About Commodities:
  14. All About Short Selling:
  15. @ttaulli:

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