Should I Buy Groupon? 3 Pros, 3 Cons

by Dan Burrows | August 8, 2013 1:05 pm

Groupon (GRPN[1]), the daily deals site, just might have a future after all.

Shares jumped more than 25% in Thursday trading after the company posted a 7% rise in quarterly revenue and a smaller loss than Wall Street was expecting. The troubled company also named interim CEO Eric Lefkofsky as a permanent replacement for Andrew Mason, who was ousted in February.

Groupon is in the midst of overhauling its business strategy now that interest in one-shot daily-deal offers by email are on the wane. And judging by the most recent results, the efforts appear to be paying off.

Hey, if nothing else, at least Groupon is growing once again.

Shares were up 75% year-to-date even before Thursday’s big rally. Now they’re up more than 125% for 2013. However, at a little more than $11 a pop, the stock is still well below the $20 it fetched when Groupon went public back in November 2011.

Clearly, some optimism has returned to this formerly red-hot tech stock — but that doesn’t necessarily mean it will last.

So, should you buy Groupon? To decide, let’s look at some of the pros and cons:

Pros

New Business Plan: Groupon’s focus on its Goods business, which offers discounts on a wide variety of items all the time, is working. That’s helped stabilize the once floundering company — and has it actually growing again. The top line may have increased only 7%, but in North America, which contributes almost two-thirds of total sales, growth jumped 45%.

Mobile Success: Smartphones and tablets are critical to Groupon’s future prospects, partly because offers can be personalized and location-specific when served up to mobile users. The good news is Groupon is gaining traction in mobile: Almost 50% of North American transactions in June came from smartphones and tablets, up from about 30% in the year-ago period.

Wall Street Upgrades: Sell recommendations are rare on the Street, so you know something is seriously off with a stock when it has more than one. Happily for Groupon, a slew of analysts upgraded the stock thanks to the better-than-expected earnings. UBS, for example, raised its rating to neutral (hold, essentially) from sell. Raymond James upped it to market perform (hold) from underperform (sell, essentially). And Bank of America/Merrill Lynch lifted its recommendation to neutral from underperform.

Cons

International Weakness: North America is by far the largest contributor to sales, but that doesn’t mean Groupon can ignore the rest of the world. Indeed, the company cited international growth as a critical component for further success. Indeed, it’s invested heavily in overseas expansion. Too bad international revenue declined 24% in Europe, Middle East and Africa in the second quarter, and dropped another 26% in other foreign markets.

Weak Guidance: Yes, Groupon turned in a better-than-expected quarterly report that fired up the market — but the rally may be extremely overdone. Groupon itself offered up a disappointing forecast for the current quarter. The company projected adjusted earnings in the range of a loss of 1 cent to a profit of 1 cent a share. The Street was looking for earnings of 5 cents a share.

A Quarter, Not a Trend: Groupon still has a tremendous amount of work to do to turn the most recent, decent quarter into a recipe for continued success. And despite Thursday’s massive rally, there are still plenty of doubters. As Edward Woo — an analyst at Ascendiant Capital Markets who has a sell recommendation on the stock — wrote in a note to clients: “In our view, the slowing growth and weak margins are likely to bolster continued skepticism as to Groupon’s valuation, growth prospects, and profit potential.”

Bottom Line

So, should you buy Groupon? Nope — Thursday’s rally actually should be looked at as an opportunity to get out of this name, which is still plagued by uncertainty due to staff turnover, competition and increased investments back into the business. Shares are still well below the $20 offering price and don’t look like they’ll get back there anytime soon.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. GRPN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRPN

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