Groupon Inc Has Much Bigger Problems Ahead (GRPN)

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So much for that mini-rally in Groupon Inc (GRPN) stock.

Groupon Stock Has Much Bigger Problems Ahead (GRPN)After more than doubling from its February bottom, GRPN plummeted more than 6% after hours Thursday in the wake of some underwhelming, if not technically disappointing, first-quarter earnings.

That came on the heels of a 3.9% drop off during Thursday trading, so all told, Groupon stock declined 10% in less than 10 hours, and is currently down 15% in Friday morning trading.

The daily deals site lost $49.1 million in the first quarter, or 8 cents per share on a GAAP basis, as the company continues to spend heavily in an effort to attract more online shoppers. Sales came in at $732 million, down from $750 million a year ago, but well ahead of analysts modest expectations of $708 million.

Pretty ho-hum results. And, in my opinion, not enough to inspire confidence in a stock that has never come close to living up to its initial public offering.

Don’t Buy the Turnaround in Groupon Stock

To be fair, Groupon has several things going for it as a leader in the competitive e-commerce coupon space:

  • Sales Are Growing: The 2.4% dip last quarter was just the second year-over-year decline for GRPN in the last 10 quarters.
  • Atairos’ $250 Million Investment: A new private investment firm founded by former Comcast Corporation (CMCSA) executive Michael Angelakis, Atairos invested $250 million in Groupon, $200 million of which will go toward Groupon’s ongoing share repurchase program. Because the fund is backed almost entirely by Comcast, Atairos’ investment in Groupon has fueled speculation that Comcast plans to use the deal to use Groupon’s local advertising business to boost sales of its own local advertising business, Comcast Spotlight.
  • Jack Ma: Alibaba Group Holding Ltd (BABA) acquired a 5.6% stake in the company in late 2015. That’s a nice show of faith from China’s largest e-commerce company

Given those positives, it’s tempting to buy Groupon stock as a nice turnaround story with plenty of upside. I simply don’t see it that way.

GRPN has never been a good stock since coming public in November 2011. Fervor surrounding online companies with name recognition helped make Groupon the biggest IPO by a U.S. internet company since Google — Alphabet Inc (GOOG, GOOGL) — raising $700 million and popping 31% in its first day of trading, despite opening 40% above its target price.

GRPN closed that first trading day at $26.11, advanced as high as $26.19 a couple weeks later and promptly went into free fall once the calendar flipped to 2012. By the end of that year, Groupon stock was down in the $5 range. It twice rose as high as $12 in 2013. Since then, it has never been higher than $8.

There are several problems with Groupon: the company has never figured out how to make money, having never turned an annual profit prior to last year’s measly 3 cent per-share haul; sales growth has slipped dramatically, from 415% in 2011 to 45% in 2012 to just 2.5% last year; and despite getting beaten down for years, the stock is far from cheap, at 94 times next year’s earnings estimates.

And numbers aside, Groupon is a relative afterthought in the online marketplace, especially compared to other e-commerce giants such as Amazon.com, Inc. (AMZN) and eBay Inc (EBAY).

Speaking of Amazon, Jeff Bezos’ company recently shuttered its own local daily deals site, Amazon Local, which tells you what it thinks about the long-term viability of the business that is Groupon’s bread and butter.

Investments from the likes of Alibaba and Atairos have emboldened other investors to buy low on Groupon stock this year. But institutions still don’t like GRPN: UBS, Wells Fargo, Bank of America and Piper Jaffray have all downgraded the stock in the last six months.

Too Much Bad History for GRPN

So while GRPN stock is still up 44% in 2016, even after yesterday’s steep decline, I think its recent momentum is fleeting.

Long term, I’m not a believer in the company’s business model, nor its ability to make money with said business model.

And above all, there are better places to invest than in a stock that lost 83% of its value since coming public.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/groupon-stock-grpn-earnings-baba/.

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