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

Groupon

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 Amazon.com (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?
Should Groupon be your top pick for 2014? Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers