Groupon Inc (GRPN): Investors Better Hope This Bet Pays Off

Though Groupon’s gross margin on Goods is tiny, their margin on third-party deals is huge. The end result is, the company’s operating margin actually beats Amazon and Best Buy. Groupon Inc (NASDAQ:GRPN)’s overall operating margin was 3.53%, versus 1.13% at Amazon, and 0.11% at Best Buy. Wal-Mart is more established, and isn’t growing nearly as fast, which accounts for their operating margin of 6.72%.

The ups and the downs of being Groupon
The good news for Groupon is that its Goods business is exploding. Even after a more than 1,500% gain in revenue previous quarter, Goods revenue jumped almost 744% in the last quarter. However, weakness in international third-party deals caused the company’s overall dollar growth to come in at 4%.

Two of the bigger challenges for Groupon Inc (NASDAQ:GRPN) are also huge opportunities. The company needs to grow its gross margin in the Goods business, and slow down spending in SG&A. Gross margin in the Goods business has already improved from under 3% to over 6%, but there is a lot of work left to be done.

When it comes to SG&A spending, this item represented 51.25% of total revenue last quarter. Relative to Amazon at 25.44%, Best Buy at 23.6%, or Wal-Mart at 18.13%, this is far too high. However, in my last article, I calculated if Groupon could bring its SG&A spending down to say 20% of sales, their earnings would jump from a loss of about $0.10 to a profit of $1.59 over the last year.

In the meantime, the company is sitting on $1.17 billion in net cash and investments, and with a market cap of about $5 billion, that means about 20% of the share’s value is just the cash on the balance sheet. Both of the company’s businesses offer exclusive pricing, so the company doesn’t have to worry about being undercut. With analysts calling for 24.68% EPS growth, but the shares trading for over 43 times 2013 estimates, the stock isn’t for the timid. However, if Groupon Inc (NASDAQ:GRPN)’s bet on Goods pays off, this could be the start of something…good.