Every investment in the stock market has an inherent risk, but some investments are obviously riskier than others. In any industry, every stock has a different risk profile, but some industries are similarly riskier than others. Internet companies are one of the riskiest investments on the block. This is because, unlike others corporations, there are no tangible assets to fall back on, i.e. little liquidation value. The entire value of the company is based on future sales estimates and the value of the website, i.e. the brand. For such online businesses, it is very difficult to calculate the true revenue base and thus a probable value of future cash flows. These valuation/estimation issues lead to varying assumptions about the true value of the investment and are the primary reason why investors have lost and earned so much from investing in Internet companies.
In the last few years, the investors of Groupon Inc (NASDAQ:GRPN), Pandora Media Inc (NYSE:P) and AOL, Inc. (NYSE:AOL) have seen shifting fortunes. As the chart below shows, the stock prices of Groupon Inc (NASDAQ:GRPN) and Pandora have declined significantly. The stock price of Groupon Inc (NASDAQ:GRPN) has declined by approximately 77% in the last couple of years. This decline has been due to the company’s inability to convert sales growth into profit growth. It has even been called a Ponzi scheme by investors, and serious concerns still remain on the ability of its business model to create shareholder wealth. AOL is a very different story; since the company has gone public it has taken a smart and focused approach to generating profits. Unlike Pandora Media Inc (NYSE:P) and Groupon Inc (NASDAQ:GRPN), AOL, Inc. (NYSE:AOL) stock price has skyrocketed with a return of 82% in the last two years.
Source: Google Finance
The company posted its earnings for the quarter ended December yesterday. The street was expecting Groupon to post an EPS of $0.03 per share on revenues of $639.8 million. The company missed expectations and reported an EPS of $-0.01 on revenues of $638.3 million. Another major concern for investors was the adverse forecast for the current quarter. The combination of this bad news has driven down the company price by 22% and has raised more questions on the business model of Groupon Inc (NASDAQ:GRPN).