Is Groupon Best of Breed Heading Into Earnings?

Groupon is due to report fourth-quarter results Thursday. Heading into earnings, is Groupon an excellent prospect, or do eBay, Amazon, or LinkedIn provide better opportunities?

Feb 19, 2014 at 5:30PM

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.


Source: Wikimedia Commons

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'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.

Grpns Costs

Source: MSN Money

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.

Amzns Costs

Source: MSN Money

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. 

Ebays Costs

Source: MSN Money

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.

Lnkds Costs

Source: MSN Money

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.

Foolish takeaway
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?
Groupon, LinkedIn, Amazon, and eBay all provide the Foolish investor with opportunities to make huge sums of money if they can please Mr. Market.  However, are any of these The Motley Fool's top stock for 2014 or is there something better available?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends, eBay, and LinkedIn. The Motley Fool owns shares of, eBay, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information