Is Groupon Inc (GRPN) Worth Having in Your Portfolio?

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Profitability

Groupon’s profit margin diminished in the first quarter of 2013: the operating profit margin fell from 7.1% in the first quarter of 2012 to 3.5% in the more recent period. Despite the recent decline in profitability, Groupon’s profit margin remains higher than Amazon’s profitability, which reached 1.1% in the first quarter of 2013. eBay is still leading the way in this aspect as its profit margin reached 19.3% in the second quarter of 2013, which is only slightly lower than the profit margin recorded in the second quarter a year earlier. In the near future, both eBay  and Amazon could see a slow decline in their profitability due to currency risks, an ongoing slowdown in Europe, and stronger competition.

Based on the above, Groupon’s profitability is in the middle of the pack of other leading online companies. Looking forward, the company’s outlook for the second quarter of 2013 projects its profit margin will be between 3.5% and 6.4%, which is much lower than the profitability in the second quarter of 2012. Moreover, in 2013, the company’s operating profit may reach $100 million, which is less than last year’s profit. This means Groupon Inc (NASDAQ:GRPN)’s profitability isn’t likely to improve in the near future.

Valuation

Another factor that may influence investors is Groupon’s valuation compared to the industry and compared to other leading Internet-based companies. To that end, let’s analyze these companies’ enterprise value and their EV-to-EBIT ratios.

The table below presents the summary of all three companies’ EV-to-EBIT ratios.

This calculation considers these companies’ different financial structures. The yearly EBIT is based on the past four quarters (ending in the first quarter of 2013). As seen, Groupon’s EV-to-EBIT ratio is higher than the industry average. Amazon’s ratio is much higher than both Groupon’s and the industry average. eBay’s ratio is close to the industry average. This means that Groupon’s current value is high for its industry, which makes this company a less attractive investment from a valuation standpoint.

Takeaway

Based on the above, I remain doubtful as to the future course of Groupon. The company’s growth rate in revenue is high in the U.S but continues to decline in the international segment; Groupon Inc (NASDAQ:GRPN)’s profit margin isn’t high and its valuation seems high for the industry, which makes this company less of a bargain at this stage.

The article Is Groupon Worth Having in Your Portfolio? originally appeared on Fool.com and is written by Lior Cohen.

Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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