Groupon (GRPN) stock was down 50% before it posted earnings, and Friday’s big boost from the mixed message of quarterly results is likely to be temporary.
After all, GRPN — already in the midst of a difficult transition — once again looks incomprehensibly unsure of itself. What does it say about management when it signals it may sell a stake in Ticket Monster, its South Korean subsidiary, less than 10 months after buying it?
Furthermore, GRPN missed some very low quarterly estimates with a much wider year-over-year loss.
Worst of all, Groupon earnings included a profit and sales forecast well-below Street views.
The key to Groupon is how well it’s managing its transition away from daily deals to become “a leading mobile commerce destination.” Rather than push emailed coupons to members, GRPN wants pull customers in to select from a list of promotions to by physical goods.
Most analysts believe that the change in strategy is the right one and will drive upside in Groupon stock if the company can pull it off.
The problem is that although there is some evidence the change in strategy is starting to take — thanks to growth in local billings and higher gross margins — it will be a very long time before this new arm of Groupon Inc. is anywhere near profitable.
Groupon Stock Rallies Despite Wider Loss
For the most recent quarter, GRPN posted a net loss of $21.2 million, or 3 cents a share, vs. with a year-ago loss of $2.6 million, or break-even on a per-share basis. Analysts on average were looking for earnings of a penny a share, according to a survey by Thomson Reuters.
The top line fared better, as revenue increased 27% to $757.1 million vs. a Street forecast for $748.8 million.
And just in case the market gets too optimistic, GRPN talked down the current quarter to help ensure Street estimates will be beatable in three months. Groupon forecast earnings of 2 cents to 4 cents — far below analysts’ average estimate of 7 cents. Revenue is pegged at $875 million to $925 million, which is also below forecasts.
Groupon stock may have rallied on evidence that its new strategy is working, but these types of stock moves usually overshoot to the upside. Whatever progress a company is making, a bit too much euphoria usually gets baked into the share price.
That’s likely what happened with Groupon stock Friday. Additionally, a big chunk of the float is sold short, and that will exaggerate any upside run.
Because this was not a pristine quarter by any means.
GRPN is in the very early stages of a very complicated change in its business. Furthermore, it likes to tout itself as one of those companies with lots of moving parts that the Street just doesn’t quite get.
Neither of those qualities make for a very reassuring investment. Betting on a transformation is risky enough. If the company can’t deliver a clear picture of what it is, what it’s doing and why that matters, why would you bother with Groupon stock?
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
