The Reason Groupon May Be Worth a Closer Look
By George Leong for Investment Contrarians | Sep 20, 2012
A casualty of the downward spiral in Internet stocks, Groupon, Inc. (NASDAQ/GRPN) cratered over 20% to below $6.00 on August 14 and all the way down to $4.00 on September 4; this was prior to the surge on Wednesday on what could be positive news regarding a new service called “Groupon Payments.”
Triggering the initial decline in the stock was a revenue shortfall of $7.0 million in its second-quarter earnings. This may not seem like much, as the company reported $568 million in revenues, up 45.0% year-over-year, but the market wanted much better results, based on my stock analysis.
Groupon was also wishy-washy towards its third quarter, with revenues expected to come in between $580 million and $620 million, which is a wide range that creates plenty of uncertainty for traders; but based on my stock analysis, there is also an opportunity. Groupon makes about 60.5% of its revenues from outside the U.S.; given the dismal situation in Europe, this makes the stock a risky opportunity, but I’m not ready to write off Groupon. I see a potential opportunity here based on my stock analysis.
My stock analysis is that those looking for a high-risk opportunity may want to take a look at Groupon, known for its daily deal offerings for a broad range of goods and services, including restaurants, and travel. Groupon will sell almost anything as long as it’s legal.
The purpose of the company and the way it makes money is to hook-up merchants to consumers via a local commerce marketplace; this marketplace caters to the user’s selected “home” area by offering deals for goods and services for businesses in that immediate area. Groupon doesn’t charge the user a fee for joining; it simply makes money from its merchants and how many deals they sell.
My stock analysis reveals the inconsistency of revenues and the fact that there are numerous rivals emerging that pose risks.
Since its $658-million initial public offering (IPO) on November 4, 2011 at a $20.00 share price, the stock traded to as high as $26.19 on November 18, 2011, prior to declining to the current level.
Chart courtesy of www.StockCharts.com
The stock popped on Wednesday after the company announced it would be moving into a new mobile payments business via the launching of Groupon Payments. Groupon’s new service will enable merchants to swipe credit cards for both Groupon payments and credit card transactions at a lower rate than other providers, according to Groupon.
While the new business is interesting and clearly is a strategy for Groupon to increase its business and revenue streams, my stock analysis shows there will be plenty of competition, such as the credit card companies and other payment platforms like PayPal and Google Inc. (NASDAQ/GOOG). For Groupon, my stock analysis is that the advantage will be the cost, as a transaction via Groupon Payments will cost merchants $0.15 per transaction plus other fees. In addition, Groupon is promising to process payments overnight versus the standard two to three days.
Revenues are estimated to rise 45.1% to $2.4 billion in 2012, based on 23 analysts’ estimates, followed by 19.8% growth to $2.8 billion in 2013.
Annual earnings are estimated to come in at $0.18 per diluted share in 2012, up from a loss of $0.72 per diluted share in 2011, and to rise to $0.37 per diluted share in 2013.
Watch the short position of 42.2 million shares, or 20.3% of the float as of August 31. If the stock rallies, expect to see short-covering in the stock, based on my stock analysis.
My stock analysis is that Groupon should only be viewed as a contrarian investment opportunity at this time, but the stock could rally if Groupon Payments catches on.
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