3 Reasons Groupon's Stock Could Fall

Groupon (NASDAQ: GRPN  ) has largely disappointed investors since its public debut. The daily deals giant, once one of the fastest-growing companies in history, has lost most of its value since it began trading in November 2011. Though it has largely moved lower, the stock has been prone to aggressive swings over the last two and a half years, surging to the upside, only to later be cut in half.

While Groupon shares are nowhere near their intraday high of $31, the stock is far removed from its all-time low.

Below are three scenarios that could cause Groupon shares to plunge. It should be noted, however, that even if these scenarios play out, Groupon shares may not fall -- a general market rally, unexpected good fortune, or random chance could send the stock higher. Still, these are three possibilities Groupon shareholders should hope to avoid.

It turns out its business model is a fad
Groupon has been a public company for nearly three years, and yet its business model is still arguably unproven. On a generally accepted accounting principles basis, the company has been consistently unprofitable since its debut; even when excluding stock-based compensation, Groupon barely makes money.

Fierce competitors, once hot on Groupon's trail, have largely fallen by the wayside. LivingSocial, for example, went from a nearly $1 billion valuation in 2012 to less than $100 million last year.

It's even a bit disingenuous to label Groupon a "daily deals" giant. Though those deals are still commonly accepted as the company's core business, Groupon has slowly moved away from its traditional model, getting into physical goods sales and adjusting the way in which it offers local discounts. Indeed, the deals Groupon offers have undergone significant revisions in recent years -- daily email blasts have, to a large extent, been replaced with featured offers on Groupon's website and mobile app. These deals don't last forever, but typically run for much longer than a single day.

It seems fair to say that the concept of daily deals was a fad that has come close to running its course. Groupon, however, has managed a pivot to some extent. Still, so long as the ultimate viability of Groupon's business remains a mystery, shares could struggle.

Groupon continues to lose money
The business's viability should manifest itself in Groupon's profit (or lack thereof) going forward. Earlier this month, Groupon shares lost nearly one-fifth of their value after the company posted earnings that fell short of analysts' expectations.

Because of Groupon's consistent losses, the company has no true price-to-earnings ratio. With the appeal of its once high-growth daily deals business losing its luster, Groupon shares could continue to head lower if the company cannot deliver profitability in the coming quarters.

Its goods business remains low margin
Groupon's expansion into traditional e-commerce could reduce its dependency on local merchants. Groupon has actually been somewhat successful in its physical goods business: Last quarter, more than half of Groupon's revenue came from the sale of physical items.

Unfortunately, Groupon's goods business simply doesn't make much money -- the segment brought in less than 25% of the company's gross profit last quarter, with margins running around 9%. Groupon's management has said the profitability of its goods business will increase over time as the company invests more in fulfillment and shipping capabilities.

The growth in the company's goods business (revenue up nearly 70% last quarter on an annual basis) is encouraging, but it may not be reflected in the stock until margins improve. If they don't improve, Groupon investors could come to doubt what may be one of the company's most significant bright spots.

A speculative investment
Groupon appears to be an incredibly speculative investment that, despite being far removed from its recent highs, could see further downside.

To its credit, Groupon has managed to adopt its daily deals model and bolster it with a physical goods operation. Yet doubts about the viability of Groupon's business, particularly in the long term, remain. Until Groupon can demonstrate consistent profitably, the stock could continue to experience sharp sell-offs.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3083238, ~/Articles/ArticleHandler.aspx, 10/23/2014 10:48:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement