Here’s a daily deal for Groupon Inc (NASDAQ:GRPN) shareholders – its stock. The more people sign up to buy it, the cheaper it becomes. After the company’s recent disastrous fourth quarter earnings, which wiped out over a quarter of its market cap overnight, those investors are probably wondering if they can still get a refund for their unwanted group discount. But is Groupon really as doomed as the markets and analysts would have you believe? I think Groupon, with its unique business model and dominance of a niche market, shouldn’t be dismissed outright. Let’s take an in-depth look at Groupon to see if it is a deal or a dud.
Fourth Quarter
For its fourth quarter, Groupon lost 12 cents per share, or $81 million, on revenue of $638.3 million. Earnings slid from a loss of 2 cent per share in the prior year quarter, but revenue rose 29.69%.
Analysts had expected Groupon Inc (NASDAQ:GRPN) to report adjusted earnings of 3 cents per share on $638.41 million in revenue.
However, gross billings rose 24% over the prior year, which CEO Andrew Mason was quick to point out as “a clear signal that customers love Groupons.”
That optimism is slightly reflected in the average earnings outlook for the first quarter, where analysts forecast a profit between 5 to 6 cents per share.
A Frightening Trinity of Daily Deals: Facebook, Google and Amazon
Groupon’s core business model faces a tough challenge from three formidable competitors: Facebook Inc (NASDAQ:FB), Google Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN). All three companies have a similar theory behind their three respective products and investments: Facebook Offers, Google Offers and LivingSocial. Why would customers sign up with Groupon, which has a comparatively smaller footprint on the web, when they can simply sign up for an additional feature on a site they already trust and use on a regular basis?
Facebook Offers is the successor to its Facebook Deals platform, its first aborted attempt at offering daily deals. Facebook Offers are limited-time offers which periodically show up on the News Feed for followers of a business’ Facebook page. When followers claim the offer, then it is automatically promoted to that users’ friends, who can claim it as well. The system is minimally intrusive and integrates well into Facebook’s News Feed.
Google Offers is a dedicated site that more closely resembles Groupon’s business model of offering localized deals to subscribers. However, it lacks cohesive integration into the rest of Google’s ecosystem, and its Google+ social platform is still far too weak to carry it to mainstream adoption.
In December 2010, Amazon invested $175 million in LivingSocial, which also offers a similar approach of localized subscriptions used by Groupon and Google Offers. Amazon has been criticized by investors for its stake in LivingSocial, which has resulted in losses for the e-commerce giant ever since the initial investment. However, Amazon also offers Local Deals in its main website, which target users by area.
Of these three companies, Facebook, with its one billion users, has the most sustainable and innovative business model. Amazon could benefit from more cohesive integration of LivingSocial into its primary website, but it risks cannibalizing some of its own daily and local deals features.
The Foolish Fundamentals
Groupon’s fundamentals are also nothing to write home about.
| Forward P/E | 5-year PEG | Price to Sales (ttm) | Price to Book (ttm) | Debt to Equity | Return on Equity (ttm) | Profit Margin | |
| Groupon | 18.13 | 0.95 | 1.79 | 4.90 | No debt | -4.26% | -1.77% |
| 34.01 | 1.64 | 12.58 | 5.39 | 20.04 | 0.64% | 1.04% | |
| 14.97 | 1.28 | 5.25 | 3.68 | 10.05 | 16.61% | 21.40% | |
| Amazon | 72.92 | 4.38 | 1.96 | 14.89 | 53.53 | -0.49% | -0.06% |
| Best Value | Groupon | Groupon | Groupon |
Source: Yahoo Finance
While the stock may seem deceptively undervalued in terms of its 5-year PEG ratio and clean balance sheet, the company’s negative profit margins make its price-to-book ratio of 4.90 look downright frightening. Following Buffett and Graham’s theory of value investing based on book value, Groupon needs to shed another 80% of its market cap before it can be considered undervalued.
That theory would only work if Groupon can keep growing revenue and cash reserves at sustainable rate.
GRPN Cash and Equivalents data by YCharts
On the surface, things don’t look too horrible, but expenses are rising while free cash flow growth is decreasing.
GRPN Revenue TTM data by YCharts
Its top and bottom line growth also shows some positive signs of growth, but right now investors are probably too horrified by its recent 25% plunge to notice that its earnings growth is actually outpacing its revenue growth — an encouraging sign that its operating margins are under control.
A New CEO?
Calls for founder and CEO Andrew Mason to step down have been resonating in Wall Street for over a year now, after the company’s 2011 IPO failed to gain any traction with investors. Mason has often been portrayed by the media as quirky and offbeat, and he didn’t do himself any favors by posting videos of himself doing yoga in his underwear before the company went public.
Much like Facebook’s hoodie-wearing Mark Zuckerberg, Mason has clearly stated that he wasn’t the “Wall Street” type. However, while Wall Street now shows Zuckerberg some degree of faith, after Facebook’s recent earnings showed strong mobile advertising revenue, few analysts are standing behind Mason.
The Foolish Bottom Line
There’s no question that Groupon needs to get its act together before it gets obliterated by its larger, better funded rivals. Although Groupon has over 200 million registered users, only approximately 25% have actually signed up for a deal on the site. Low barriers to entry are also a major threat to the company that is now struggling to stand out in the niche market that it created. Add these to a potential to plunge another 80% before hitting book value, and you’ve got one daily deal that would be smarter to pass on.
The article Is Groupon’s Stock a Daily Deal or a Done Deal? originally appeared on Fool.com and is written by Leo Sun.
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