Groupon (NASDAQ:GRPN) stock has plunged 36% over the past year due to poor earnings growth, weak guidance, and rising competition in the local and daily deals space.

GRPN Chart

Source: Ycharts.

In its most recent quarter, Groupon earned $0.03 per share (non-GAAP) as revenue rose 27% year-over-year to $757 million. Analysts polled by Thomson Reuters had expected the company to earn a single a cent on revenue of $749 million. Unfortunately, Groupon's fourth quarter guidance fell short of Wall Street estimates for both revenue and adjusted EBITDA. Is Groupon a contrarian play which could still bounce back, or is it destined to drift lower in 2015?

Groupon's biggest problems
The first problem with Groupon is its valuation. With a forward P/E of 50 and a 5-year PEG ratio of 5.05, the stock looks overpriced and bottom line growth potential looks weak. Looking back, we see that Groupon's annual revenue rose 60% between fiscal 2011 and 2013, but it hasn't ever squeezed out a GAAP-adjusted annual profit.

The second problem is its lack of competitive barriers. Amazon.com (NASDAQ:AMZN) rolled out Amazon Local, which competes directly against Groupon, in June 2011. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) also launched Google Offers in 2011, but it was shut down earlier this year, presumably to be integrated into Google Shopping Express.

Groupon is also shifting away from its Daily Deals model and toward its Groupon Goods marketplace service, which accounted for 54.3% of the company's top line last quarter (up from 42.4% a year earlier). This is troubling, because the Goods marketplace, which requires Groupon to ship products, has a lower gross margin -- 20%, than the Daily Deals segment which boasts a margin of 88%. As a result, Groupon's slim operating and profit margins have declined over the past year.

GRPN Operating Margin (TTM) Chart

Source: Ycharts.

Groupon's core strengths
But we also shouldn't assume that Amazon and other heavyweight competitors will simply crush Groupon.

Last quarter, Groupon's global units (vouchers/products sold prior to cancellations/refunds) rose 92% year-over-year to 88 million. Units increased 11% in North America, 30% in Europe/the Middle East/Africa, and 316% across the Rest of the World. Rest of World billings also soared 155% thanks to its acquisition of Korean e-commerce company Ticket Monster in January.

Groupon's "active" deals (flash sales) rose 25% sequentially to 300,000. "Active" customers, who made a purchase within the past 12 months, rose 24% year-over-year to 52.7 million. Meanwhile, trailing 12 month billings also rose 5.7% sequentially to $149 per active customer.

Last year, Groupon shifted its business model from a "push" to a "pull" model. In a "push" model, Groupon sends email blasts to lure users in with special deals. In a "pull" model, customers naturally come to the site to search for products and services. Groupon reported that 10% of its North American traffic during the third quarter came from "pull" searches, and those customers spent "significantly more" than push customers. 

Dealing with competitive pressure
Groupon also knows that its competitive barriers are low. In last quarter's 10-Q filing, Groupon warned that "a substantial number of companies that attempt to replicate our business model have emerged around the world", and that it must "compete against other large Internet and technology based businesses" like Amazon and Google.

Image

Groupon (L) and Amazon Local's (R) iPad apps. Source: iTunes.

So far, Groupon still offers more products and services than many of its competitors. As of this writing, Groupon offers 229 dining deals in the Dallas area, while Amazon only offers 35. For spas and salons, Groupon offers 988 deals, versus 152 on Amazon.

Groupon is fighting back against disruption with disruptive tactics of its own. In May, Groupon introduced Gnome, an "iPad as a register" platform (similar to Square Register and Amazon Local Register) to establish a presence among brick-and-mortar retailers. In October, it launched thousands of business pages to take on Yelp, Facebook, and Google. Whether or not these initiatives will make an impact remains to be seen, but Groupon is letting the competition know that it doesn't plan to go down without a fight.

The road ahead
But in the near term, Groupon's negative qualities still outweigh the positive ones. The stock is still expensive, costs are rising, margins are falling, and it's unclear if its bold new initiatives will shield it from the disruptive Goliaths of the tech industry. There are glimmers of hope on the horizon, but I'd like to see better margins and bottom line growth before investing in this stock.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, 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.