Shares of Groupon (NASDAQ:GRPN) hit a 52-week low on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.
How it got here
One year ago I listed five reasons why I wouldn't buy daily deal site Groupon. Today, four of those five reasons remain valid, and I'm not surprised to see the stock down 85% since I voiced my pessimistic views.
There's limited barriers to entry into the daily deal business. Google (NASDAQ:GOOGL) has integrated daily deals into its maps platform, alongside Microsoft (NASDAQ:MSFT), Yahoo! (NASDAQ:YHOO), and Amazon.com (NASDAQ:AMZN) also offering daily deals. Amazon.com also made a $150 million investment in Groupon's largest privately held rival, LivingSocial. In short, getting into the daily deals game hasn't been difficult for companies with deeper pockets than Groupon.
There's also little longevity and customer loyalty when it comes to daily deals. I'm not much of a daily deal user, but I have little interest in whether I'm accepting offers from Amazon, Yahoo!, or Groupon. If it's a deal that interests me, the company supplying it makes little difference, and you'll find my opinion reflected by most consumers.
Perhaps the biggest detriment is that the daily deal platform isn't very profitable. Amazon recently noted that LivingSocial recorded a whopping $274 million loss in its latest quarter as daily deal enthusiasm has waned. Groupon reported a 45% increase in revenue in its second-quarter results in August. However, this growth produced a GAAP profit of just $0.04.
Finally (and this wasn't one of my points last year), Groupon can't seem to put its accounting skeletons behind it. In a September 2011 filing, Groupon changed the way it accounts for revenue and restated its results. In March, it happened yet again, with an "internal weakness in accounting controls" noted in its annual filing, according to the The Wall Street Journal. On Friday, it was like deja vu, with Groupon responding to an SEC request to shore up its disclosure process, but stopping short of supplying all the required information requested of the company.
How it can regain its swagger
First and foremost, Groupon needs to address its accounting issues and bring someone in as CFO who will quell its revenue recognition woes that have plagued the company for more than a year. If investors are going to have any confidence in Groupon's business model, they must first have confidence that another restatement won't be needed.
Groupon's also going to need to do a better job differentiating its business from similar deal sites offered by Amazon and Microsoft. One way it can do this is by focusing on mobile growth opportunities, a largely unmet area that market leader Google doesn't even have a formula for success perfected yet. It'll also need to remain focused on small U.S. businesses, as they are the bread and butter of Groupon's daily deal model. Groupon needs to ensure it doesn't spread itself too thin, or go crazy with its expansion efforts in Europe, or it could lose small business owners to its peers.
Now for the $64,000 question: What's next for Groupon? The answer is going to depend on whether Groupon can continue to grow its bottom-line profits, if it can differentiate its daily deals from the competition, and if investors can ever trust its accounting practices.
Our very own CAPS community gives the company a dreaded one-star rating (out of five), with just 15.8% of members (a mere 125 out of 791) expecting it to outperform. This is one case where I wholeheartedly agree with the CAPS majority, as my current CAPScall of underperform is up an impressive 97 points.
Despite the near-double, I have no intention of closing out my Groupon CAPScall, as I still see no longevity in the business model. Groupon is faltering at nearly every step: It can't get its accounting practices in check, it can't prevent larger peers from entering the daily deal sector, and it can't keep its costs low enough to produce meaningful earnings growth. With each subsequent quarter, the success of daily deal sites looks more like a passing fad. Groupon does have a healthy cash balance of $1.2 billion, but I see no reason why it couldn't lose another 50% (or more) of its value.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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