Don’t Jump Into Groupon — Yet

Let earnings be your guide, not your gamble

   

I find no small amount of irony in the fact that shares of Groupon (NASDAQ:GRPN) — a business centered around “daily deals,” which provide exorbitant discounts on everything from restaurants to spa treatments to scuba-diving lessons — are themselves drastically slashed and priced to buy.

But unlike 80%-off-sushi-Tuesday coupons, don’t feel compelled to pounce on GRPN just because you might risk losing out on a boffo bargain.

Trust me, you have time.

Groupon stock is sitting about 60% off its first-day close of $26.11 following its November initial public offering. At under $11, it’s at all-time lows — a fact sure to perk the ears of “buy on the dip” bargain-chasers.

Plus, there are at least a couple of short-term hopes for positivity.

For instance, in just a couple weeks, Groupon will be reporting first-quarter earnings, which could be a turning point. With analysts estimating a 1-cent profit, even meeting expectations would signify GRPN’s first foray into profitability in its short corporate life — and likely would spur a significant pop from investors beaten down by loss after loss. Plus, analysts expect Groupon to turn a 5-cent-per-share loss in 2012 into a 47-cent profit the following year.

And while it’s more of an intangible, social stocks as a whole could see increased interest as the Facebook IPO machine really gets into full gear.

Plenty to get excited about, right?

Well, I’m also not lost on the irony (and maybe futility) of preaching patience about an investment in social media — one of the greatest reflections of the 21st century’s “now now now” mantra. Still, I’m giving it a go and saying don’t buy Groupon.

At least not yet.

Groupon is expected to turn a 1-cent profit this quarter. That doesn’t mean it has. And considering Groupon has a track record that includes never recording a quarterly profit and multiple earnings restatements, it’s worth walking into the May 14 report with a healthy helping of skepticism. And caution.

You see, Groupon investors have itchy trigger fingers when it comes to bad news. For example:

  • Nov. 22: Groupon drops 15% after rival LivingSocial announces a large Black Friday initiative.
  • Feb. 9: Groupon drops 14% after it reports 8-cent loss, missing expectations for a 3-cent profit.
  • April 2: Groupon drops 10% after it restates earnings, cutting revenues by $14 million.
  • April 30: Groupon drops 10% after Starbucks (NASDAQ:SBUX) CEO Howard Schultz and venture capitalist Kevin Efrusy step down from the board of directors. (Note: This last item raised the brow of IPO Playbook editor Tom Taulli, who said, “Howard Schultz leaving the board is a big danger sign. He’s one of the world’s best CEOs and it seems like he has better things to do than be on the board of Groupon.”)

Most stocks lose ground on bad news, but Groupon really seems to break out the shovel.

I’m not saying Groupon is a sure-fire failure. Far from it. While the daily-deals business is proving difficult, GRPN still is the category’s biggest player and the most recognizable name. Acquisitions of FeeFighters and OpenCal open the door for expansion into new revenue sources. And again, at least down the road, it looks like the “smart money” expects Groupon to put together meaningful profits.

But it’s that potential that warrants prudence.

If you get in now, you could profit on an earnings pop … or get clobbered. However, if you stay on the sidelines and use this earnings report as a gauge, a profit — under real accounting standards, no less — would signal that GRPN might be more than a speculative play. It could be a real business with a real chance for future growth, and thus a potential real investment.

That’s a risk worth taking.

Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.


Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/when-not-to-jump-into-groupon/.

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