Why Groupon, Inc. Stock Has Plunged 40% in 2014

Source: Groupon.

Three years ago, Groupon (GRPN 8.21%) seemed to be on top of the world, riding the wave of interest in social media with its daily deals offerings that were the latest craze among retailers and their customers. Yet shortly after its IPO in late 2011, Groupon lost the confidence of shareholders, and the stock plunged in response. Now, Groupon is trying to recast itself as a broader-based e-commerce purveyor, but no one's quite sure whether the new strategy will work better than the old one did.

Groupon began as a high-volume provider of daily coupon deals through its impressive list of email subscribers. By offering even small businesses the opportunity to capture new groups of customers, Groupon hoped that it could build a business model based on merchants' willingness to keep offering discounts. Yet mixed results from Groupon campaigns left the daily deals space in ruins, and now, Groupon has turned toward greater direct sales of goods in order to drive revenue. Let's look at Groupon to see whether it can pull out of its tailspin before it's too late.

Stats on Groupon

Source: Yahoo! Finance.

Why hasn't Groupon pulled out of its slump?
Groupon's stock has struggled this year largely because it wasn't able to live up to the high expectations that some investors set for the Internet commerce company. Coming into 2014, investors wanted Groupon not only to report substantial progress in producing sales growth but also to give positive guidance for its immediate future. Yet early in 2014, Groupon failed to deliver as optimistic an assessment as some investors wanted to see from the company, sending shares plunging again.

The key question that Groupon faces is whether it can become more consistently profitable. So far, Groupon has done a good job of keeping its revenue rising, and for many up-and-coming companies, making sure to keep sales growth at a reasonable pace is enough to make optimistic investors more willing to wait for what they see as inevitable profits to come.

Source: Groupon.

But the question is where growth will come from going forward. On one hand, the daily deals industry appears to have limited upside, with an industry report from IBISWorld projecting that five-year growth in the daily deals arena will amount to barely 20%, with just $4 billion in annual revenue expected in 2018. On the other, broader e-commerce initiatives like selling a wider array of consumer products in bulk and expanding into promising markets like South Korea can contribute to rising sales, but with margins much narrower on these goods than on its daily deals, Groupon's ability to produce profit from its transformative efforts remains unclear.

Can Groupon rise again?
Groupon's efforts now center on getting customers to come to it, rather than having to reach out and grab potential buyers through email marketing. By broadening its appeal beyond the gimmicky daily deals space, Groupon could attract more active customers, and already, the company has seen positive responses from consumers as a result of its recent moves.

As much as the company wants to keep its Internet-based success, an arguably larger opportunity for Groupon is the mobile side of the business. So far, Groupon has managed to get 92 million people to download its app, and the company says that mobile makes up more than half of its overall business. Given the huge recovery in shares of Facebook (META -10.56%) that came in large part from its success in tapping the mobile market, Groupon shareholders hope that they will see the same positive impact for their stock as well.

The end game for Groupon investors
Groupon's relatively modest valuation reflects skepticism among most investors whether the daily deals pioneer can adapt to new conditions and find new ways to succeed. But if Groupon can defy the pessimists and stand up to larger rivals in the e-commerce space, then the stock has plenty of room to soar higher from current levels after its terrible performance so far in 2014.