Feb. 20 is slated to be a big day for Groupon (NASDAQ: GRPN) shareholders. After the market closes, the company will report earnings for the fourth quarter of fiscal 2013. During its first three quarters of last year, the business failed to report a profit, but analysts remain cautiously optimistic that the company can beat the trend. Nevertheless, is Groupon an attractive opportunity for the Foolish investor, or would it be wise to stay away?
Mr. Market's expectations are steep!
For the quarter, analysts expect Groupon to report revenue of $718 million. Top-line estimates represent a 12.5% jump compared to the $638.3 million the company reported for the fourth quarter of fiscal 2012. On top of higher revenue expectations, Mr. Market seems to believe the company will finally turn a profit!
(Analyst estimates for Groupon)If analysts are accurate, Groupon should report earnings per share of $0.02. Admittedly, this does not make the company cheap, but it represents a significant improvement compared to the $0.12 per-share loss the company reported the same quarter a year earlier.
Does this make Groupon a bargain, or are there better opportunities?
Over the past three years, Groupon has been an engine for growth. Between 2010 and 2012, the company grew its revenue 646% from $312.9 million to $2.3 billion. This makes its growth far stronger than eBay's (NASDAQ: EBAY ) 54% growth rate from $9.2 billion to $14.1 billion or Amazon.com's (NASDAQ: AMZN ) 79% growth rate from $34.2 billion to $61.1 billion over the same time frame.
One of the only online businesses that has kept pace with Groupon over the past three years has been LinkedIn (NYSE: LNKD ) , which grew its top line by 710% from $120.1 million to $972.3 million.
In terms of profitability, though, Groupon has been a major letdown. Over these past three years, the business has seen rising costs hinder its ability to report positive earnings. Fortunately, the company has seen its net loss narrow from $389.4 million to $54.8 million, but a rising cost of goods sold has prevented the company from posting a profit.
Based on the table above, Groupon has benefited from its selling, general, and administrative expenses falling from 155.7% of sales in 2010 to 64.9% in 2012. In part, this has been offset by a rising cost of goods sold for the business, which rose from 13.7% of sales to 30.8%.
But of course, Groupon isn't the only online business that has had problems with profitability over the past few years. Between 2010 and 2012, Amazon has seen its net income fall from $1.2 billion to a net loss of $39 million.
After analyzing Amazon's data in the table above, we see that it, too, was hit with rising costs, but the fluctuations between its cost of goods sold and selling, general, and administrative expenses nearly offset one another. Upon further analysis, the primary reason behind the company's profitability troubles seems to stem from rising research and development expenditures. Removing the effects of research and development, Amazon's net income would have risen 77%, nearly the same as the revenue increase.
Unlike Amazon and Groupon, eBay's financial situation has been a little more clear. Between 2010 and 2012, eBay saw its net income rise 45% from $1.8 billion to $2.6 billion.
As we can see in the table above, the cost structure of the company hasn't changed materially, but the disparity between its revenue increase and net income increase was driven by a 73% leap in research and development spending. This pales in comparison to the 163% rise in R&D spending incurred by Amazon and looks better in the short term; but in the long term, it could leave eBay at a further disadvantage to its larger rival.
Probably the best performer of the bunch over this period has been LinkedIn. In addition to its extraordinary top-line growth rate, LinkedIn also managed to grow its bottom line significantly. In aggregate, the company's cost of goods sold and selling, general, and administrative expenses actually shrunk between 2010 and 2012, which allowed the business to turn its net loss of $4 million into a gain of $21.6 million.
Based on the data provided, it appears as though analysts expect Groupon to perform well this quarter. Unfortunately, it's not possible to know if this will come to fruition heading into earnings; however if management is successful in turning its recent losses into gains, it could spell tremendous upside for shareholders. One thing is certain, though. While Groupon could be an attractive prospect, all three of its peers are fundamentally more sound. Moving forward, this might change; but for the Foolish investor who is looking for a safer alternative to investing in online businesses, LinkedIn, Amazon, or eBay might be better prospects.
Groupon and its peers provide opportunity; but is there something greater?
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