by Hilary Kramer | November 11, 2013 11:55 am
Last week’s earnings report from Groupon (GRPN) sparked a brief rally. But while the fundamentals have recovered faster than Wall Street expected, the stock has already priced in all the improvement and more.
Groupon has spent the last year reinventing itself as a global mobile commerce company after the “daily deals” business model hit a brick wall. Management has spent hundreds of millions of dollars bolting rival marketing engines onto its platform in order to achieve critical mass.
In the long term, those efforts may give the company renewed relevance within the larger online advertising universe. The fact that North American revenue is accelerating is definitely grounds for hope, and the acquisitions should contribute to a record-breaking fourth quarter.
Unfortunately, the business is still under pressure everywhere but North America, leaving GRPN with only a 4.7% year-over-year improvement to show for all the M&A – and with the third quarter of 2012 widely considered a disaster, a single-digit rebound from those levels is not yet a real cause for celebration.
Until next quarter’s results come in, the best investors can say about GRPN is that the business was a little stronger than it was last year and that the company burned a little less money. We may have seen the inflection point.
But in the here and now, very similar numbers only rated GRPN a valuation as low as $2.76 a share. Does the prospect of the company returning to its pre-IPO growth trend really justify nearly a 250% premium on that price?
It’s also an open question how fast GRPN can really rebuild its cash streams. The company’s golden age extended from 2008 to 2011, but after that point annualized revenue growth has not topped 40%.
Wall Street only expects sales to increase 4% to 15% a year between now and 2017. If margins remain as rich as they have been, profitability may come around at a faster rate, but at this point extremely high multiples are baked into GRPN at half this price.
Meanwhile there are opportunity costs to consider. You might not like Facebook (FB), but it has been doing much better when it comes to monetizing its own – much deeper – consumer relationships. Facebook has learned how to direct sales offers to users who are more likely to take advantage of them.
And Facebook’s revenue is growing at a rate 11 times above what Groupon has been able to deliver. Facebook is already profitable, albeit priced at a P/E slightly above 100. Groupon’s ability to operate on a sustainably profitable basis is still on the speculative side.
Likewise, Google (GOOG) has learned to route commercial come-ons to Web users as part of its larger paid search business. The sum of the parts is extremely complicated at a price above $1,000 a share, but a current P/E under 30 still seems a lot less extravagant than anything GRPN can provide in the immediate future.
For GRPN to rate a P/E of 30 at $9.50, it would need to earn 31 cents per share. Wall Street isn’t expecting that to happen before 2016 at the earliest. If the forecasts are on the money, GRPN would need to drop to $3.30 a share before its forward multiples revert to what Google currently rates from the market.
Should Facebook be your benchmark of choice, GRPN has gotten about a year ahead of the models but a price around $9 looks like it compares to where the pure social network has been moving.
The controversy is whether investors decide GRPN should be treated more like Google or more like Facebook. In the former case, the shares look grossly overpriced. In the latter, the implied premium over Mark Zuckerberg’s behemoth presupposes that GRPN is rebounding a lot faster than the analysts think.
Either way, unless you have plenty of conviction that Groupon is back with a vengeance and a stronger business model than ever, the upswings may be short-lived at best.
The company’s fundamentals have fought its way back to levels only slightly better than what raised Wall Street alarms last year. The shares recently hit their highest price since GRPN was at its peak of profitability – earning more money than the analysts seriously expect to see again before the end of 2014.
It’s just not a situation that inspires confidence.
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