Groupon Isn't Doing as Badly as Wall Street Wants You to Think

Despite a near-20% sell-off after reporting first-quarter earnings, Groupon has plenty of life left.

May 10, 2014 at 8:00AM


Source: Wikimedia Commons

After releasing earnings, Groupon (NASDAQ:GRPN) tanked, losing as much as 20% of its value over the course of the trading day. With such a shocking collapse, you'd think the company would be going out of business. But that's not the case. In fact, Groupon generated strong growth in both revenue and gross billings and is seeing particularly strong results in the international markets.

The reason for the massive sell-off post earnings appears to be that Groupon's net loss expanded. But again, on this point, the situation simply isn't as dire as you'd think. The market was clearly disappointed by Groupon missing earnings by a couple of pennies and its current-quarter outlook, but once again Wall Street is overreacting. After all, Groupon's strategy of sacrificing near-term profits for long-term investment is exactly what (NASDAQ:AMZN) has done for years.

Groupon's first quarter in review
Groupon silenced critics in one crucial way during the first quarter. That is, the company demonstrated that it's still growing. Groupon's sharp share-price decline over the past year implied that perhaps its business model was losing favor, but that's clearly not happening. Revenue increased 26% to $757 million, and gross billings, which calculate the total value of all customer transactions, rose by 29% globally. These results reflect the company's investments over the past year.

Groupon has gone on a spending spree designed to expand its presence both in new product categories and additional geographic markets. For example, Groupon bought Ticket Monster last year for $260 million in cash and stock to expand into Korea. At the time, the deal was meant to serve as a cornerstone for Groupon's plans for Asia more broadly.

In addition, Groupon acquired Ideeli, a women's fashion site based in the United States. This was part of Groupon's expansion into the goods category. These initiatives are working well to grow the top line, and CEO Eric Lefkofsky specifically mentioned goods and Ticket Monster as primary drivers for revenue and billings growth in the first quarter.

Groupon isn't profitable, but it's not what you think
At first glance, you might be tempted to dismiss Groupon entirely because of the fact that it isn't making money. This continued in the most recent quarter. Despite the top line growing solidly and billings soaring, Groupon's net loss expanded from $0.01 per share to $0.06 per share, year over year.

What makes Groupon's situation different is that it's in high-growth mode. As such, it's spending a lot of money on marketing and other expenses to keep building out its business and acquiring users. That's why management also expects a breakeven performance in the current quarter at the low end of its guidance, even though revenue is projected to rise by 23% versus the second quarter of last year. For a company reporting losses, there's a difference between a shrinking business and a company struggling to break even because it's investing to grow.

Investing for the long term is precisely what Amazon has done for years, but Wall Street routinely gives it a pass. Amazon generated 23% sales growth in the first quarter but produced a profit margin of just 0.5%.

The balance sheet provides a cushion
Of course, that's not to say that Groupon isn't without its problems. There's no guarantee that Groupon will suddenly flip a profit. After all, turning losses into profits isn't as easy as turning on a light switch. Companies, such as Amazon, can increase revenue for years without figuring out a way to turn those sales into hefty profits.

To its credit, Groupon does have a solid balance sheet, with more than $1 billion in cash and equivalents on its books. That comprises roughly 28% of the company's entire market capitalization. With that much cash, investors at least have a built-in margin of safety at these levels.

The bottom line for investors is that while Groupon's nearly 20% sell-off after reporting first-quarter earnings may look like cause for alarm, it could also provide a nice entry point. Such a shocking decline seems unwarranted. Groupon is maintaining its brand connection with consumers and is still growing the top line. With continued investment in new products and abroad, profits may materialize sooner rather than later. 

Will this stock be your next multi-bagger?
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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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