3 Reasons Groupon's Stock Could Rise

Groupon shares have been volatile in recent quarters, but could be poised for a move to the upside.

Aug 27, 2014 at 10:00AM

Groupon (NASDAQ:GRPN) has been a volatile (and at times controversial) stock since its IPO in late 2011. After hitting an intraday high of around $31 per share, the local deals giant has largely traded lower since its debut, and is down more than 65% from its IPO price of $20 per share.

Although it's mostly been a disappointment, Groupon shares could be poised for a move to upside.

Below are three reasons why Groupon shares could rise. It should be noted, however, that even if all three scenarios play out, there's no guarantee Groupon will rise. A general market downturn, unforeseen misfortune, or pure random chance could weigh on the stock going forward. Nevertheless, the following scenarios should be welcomed by shareholders.

1. Groupon achieves consistent profitability
To a large extent, Groupon's struggles in the public markets have been a byproduct of an unprofitable business. Despite its rapid early growth, Groupon's business model is still largely unproven, as the company has been unable to achieve consistent profitability.

Last quarter, for example, Groupon lost $22.9 million, or $0.03 per share. Excluding stock-based compensation, Groupon was profitable, but only to a modest extent ($0.01 per share). The consistent losses have made Groupon shares a nightmare from a value perspective. Groupon's competitors, notably LivingSocial, have largely fallen by the wayside, casting doubt on the long-term viability of its business. Nevertheless, Groupon is still seeing growth, especially in its emerging goods and travel business. Investors, however, have largely been unwilling to reward Groupon for these initiatives.

Becoming profitable -- especially on a consistent basis -- would go a long way toward reassuring investors, suggesting that despite its struggles, Groupon's business is firmly established.

2. Its goods business continues to grow
Sales of physical goods now generate more than half of Groupon's revenue, up significantly from just the prior year. Despite facing innumerable competitors, Groupon appears to have built itself a legitimate e-commerce business.

That promising goods business could become the focal point of Groupon if it continues to execute. In terms of shipping infrastructure, management freely admits that it's behind, but is working to bring its capabilities up to scale. Unlike its more established competitors, Groupon is offering something unique in the form of seemingly randomly selected, discount merchandise. Visitors are never quite sure what they'll find on Groupon Goods, though they know it's likely to be cheap.

For the time being, Groupon's image is still one of a daily deals firm. Eventually, however, its seemingly promising goods business could emerge as a more exciting opportunity, and overshadow its traditional daily deals.

3. The company is acquired
Lastly, and perhaps most notably, Groupon shares could rise if the company were to be acquired at a premium. Obviously, this holds true for all stocks, but is especially notable when it comes to Groupon.

During its most recent earnings call, CEO Eric Lefkofsky admitted explicitly that the company was "happy to entertain" any acquisition offers, though he said that Groupon certainly wasn't in the process of actively shopping itself. It's hard to tell if any major Internet players would still be interested in Groupon, but that has certainly been true in the past. Google is widely believed to have offered $6 billion for the company prior to its IPO. Obviously, that deal fell through, but other firms may be interested.

If Groupon's local reach proves attractive, a larger company could acquire Groupon, rewarding shareholders in the process.

Searching for a reasonable valuation
Assuming Groupon is unlikely to be acquired, investors should hope for management to achieve consistent profitability in the coming quarters. With the luster of daily deals fading, Groupon could also benefit from further growth in its emerging physical goods business.

At this point, Groupon remains a speculative investment that is still in the process of proving the long-term viability of its core business model.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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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