Groupon Inc (GRPN), Amazon.com, Inc. (AMZN): 2 Roadblocks To This Company’s Growth

One challenge Groupon faces is, they have to focus on price to make sure these deals can’t be outdone by Amazon, Target, Wal-Mart, or others. In addition, while the growth in this category is impressive, the company only sold $225 million of Goods in the current quarter. Compared to over $21.27 billion in sales at Amazon.com, Inc. (NASDAQ:AMZN), $22.73 billion in sales at Target, and $127.92 billion at Wal-Mart, Groupon Goods sales are not much more than a rounding error to their peers. The bottom line is, the company needs scale before they can gain better margins.

The second big issue is the amount Groupon Inc (NASDAQ:GRPN) is spending on selling, general, and administrative expenses. In the current quarter, Amazon.com, Inc. (NASDAQ:AMZN) spent 22.22% of revenue on SG&A, Target spent 19.19%, and Walmart spent 18.13%. By comparison, Groupon spent 48.19% of revenue on SG&A expenses.

What Happens If Groupon Goods Reaches Better Scale?
The average of Groupon’s peers in SG&A spending is 20%, Groupon in the last four quarters spent more than three times this percentage. If Groupon could lower their SG&A expenses to say 20% of sales, the company’s earnings per share would change significantly.

In the last four quarters, Groupon Inc (NASDAQ:GRPN) spent over $1.5 billion on SG&A expenses. Cutting this line item to 20%, would mean a cost savings of about $1.05 billion. With this adjustment, Groupon’s EPS in the last four quarters would have been $1.59 versus a loss of $0.10.

This is the crux of the Groupon story, if the company attains better scale and can improve margins and cut SG&A expenses, the stock would be ridiculously cheap. At current prices, the aforementioned $1.59 in EPS would give the stock a P/E of 3.6. I’m not saying this is going to happen overnight, or that it will happen at all.

However, if you believe in Groupon, it seems like there is a massive opportunity here. If you don’t believe in Groupon, check out their Groupon Goods and do some price comparisons of your own. When neither Amazon.com, Inc. (NASDAQ:AMZN), Target, or Wal-Mart can beat their prices, think about whether Groupon is a real threat or not. Groupon Inc (NASDAQ:GRPN) faces some real challenges to grow this business, but if they can make it work, the price of Groupon stock could be the best deal of all.

The article 2 Roadblocks To This Company’s Growth originally appeared on Fool.com and is written by Chad Henage.

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