Groupon Set for Strong Growth in Q4 Amid Regulatory Probe

Daily deals site Groupon, Inc. (NASDAQ:GRPN) appears on track to produce strong growth in the fourth quarter, driven by an uptrend in billings.

Groupon's U.S. gross billings in October hit $176 million, up 22 percent sequentially from September, according to Yipit. Groupon's strong U.S. growth in October represented more than triple the billings of its closest competitor, LivingSocial.

Gains may have been aided by travel deals from Groupon Getaways which generated $22 million of gross billings in October, according to Yipit. Travel deals typically see a take rate in the mid-20 percent range.

Extrapolating out this number across global markets puts Groupon on track to reach our 4Q11 gross billings estimate of $1.35 billion, up 224% y/y. Grouponicus holiday promotions could provide upside beyond our estimate, Benchmark Capital analyst Frederick Moran wrote in a note to clients.

Moran expects Groupon's 2011 gross billings could grow 450 percent from last year to $4.1 billion, leading to $1.6 billion of revenue. The analyst projects revenue could grow 56 percent to $2.5 billion in 2012 and 23 percent to $3.1 billion in 2013.

Product deals have a high-teens take rate, according to CFO Jason Child. Adjusting for these new revenue sources core daily deals take rate has held steady in the low 40 percent range. Competitors' attempts to steal share by offering a lower take rate or a faster payout have not worked.

The Grouponicus holiday event sold 650,000 vouchers, up 500 percent from last year during the 4- day Thanksgiving weekend, according to a blog from CEO Andrew Mason.

Today Groupon offers deals in 45 countries besides the U.S. Groupon has pioneered an Internet commerce operating system for local businesses. Barriers to entry are low. Many clones have entered. But barriers to success are high. Some competitors have faltered.

Groupon's dominant global scale, leading brand and culture of operational focus have allowed it to aggregate over half of all daily deals billings. Exponential growth could potentially drive high profit creation, said Moran who has a buy rating on the Groupon stock.

Groupon's roughly breakeven EBITDA in the third quarter and operating income shows its potential for profitability depending on marketing expense spending levels. The company has said that the marketing spending level about $700 million annualized represents a healthy amount and that it is finding ways to gain subscribers more cost effectively.

Controlled marketing spending may drive much more cash flow and profit than we have modeled, said Moran.

The analyst's positive take on the stock comes as UK's Advertising Standards Authority (ASA) said it was now referring complaints about Groupon's ads to the Office of Fair Trading (OFT).

We are taking this approach because, given Groupon's track record, we have serious concerns about its ability to adhere to the Advertising Code, ASA said in a statement.

In 2011, the ASA formally investigated and upheld complaints against Groupon's advertising on 11 occasions. Also, it informally resolved 37 cases.

Shares of Groupon closed Friday's regular trading session at $18.95. Moran has a price target of $32 on the stock.