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Groupon Pops, But Is it Time to Deal?

A lot of gains are coming as the shorts scatter to cover


The leader in daily deals finally stopped months of heavy bleeding.

Since spiking in early February, Groupon (NASDAQ:GRPN) shares have shed almost 50% of their value. However, the stock jumped 20% Monday heading into the afternoon earnings report, then gapped another 18% in after-hours trading.

That’s because Groupon finally grew up.

While the company reported a net loss of $11.7 million, or 2 cents per share, operating income improved to $39.6 million, and non-GAAP earnings were 2 cents per share — good for the company’s first-ever adjusted profit, and even a cent better than Wall Street had predicted. Revenues of $559.3 million were 90% better than the year-ago period, and also topped estimates, which were pegged at about $530 million. Gross billings — essentially, a source of future sales — more than doubled to $1.35 billion.

Another bright spot was free cash flow, which was $70.6 million. In all, Groupon has $1.2 billion in the bank.

For Q2, Groupon expects revenues of $550 million to $590 million, which is an annual growth rate of 40% to 50%. The Street forecast $558.7 million, near the bottom of the range.

There’s little doubt that local online commerce is a huge market opportunity. So far, Groupon is the clear leader, with 36.9 million active customers and more than 100,000 unique merchants. The company has the most extensive infrastructure, with over 11,000 employees.

Roughly 50% of the sales in the quarter came from existing customers. — a sign that Groupon has customer loyalty and is getting traction with its marketing strategies.

The company also is having success with its mobile strategy. In April, almost 30% of North American transactions came from mobile devices, up from 25% in December.

The strong results should help ease some of the recent disasters, perhaps the most serious of which was the restatement of Groupon’s fourth quarter. The company failed to adequately account for the expected returns of vouchers for Q1. As a result, the company’s revenues were about $14.3 million worse, at $492.2 million, boosting the company’s loss to $65 million from an original reported loss of $43 million. What’s more, Groupon reported that there was a “material weakness” in its financial controls.

To deal with this, Groupon has hired two new board members — Daniel Henry, the CFO of American Express (NYSE:AXP), and Robert Bass, chairman of Deloitte.

Despite all this, investors still should be careful in dealing with GRPN.

Several technical factors have juiced the stock. First, more than 95% of all the shares available to borrow had been shorted, and it looks like they started to cover their positions (by buying back stock) hours before the report came out, then continued after the bell. Also, Facebook’s upcoming IPO is causing lots of excitement for social stocks. For example, Zynga (NASDAQ:ZNGA) popped 6% today on seemingly no news.

The short-term boost might last a couple weeks, but then the lock-up provision for Groupon will expire on June 1, which will allow insiders to unload their positions — and that could put downward pressure on the stock.

All these factors — good and bad — have clouded the view on Groupon in the short term. If you’re interested in taking a long-term position in Groupon, wait a couple weeks and give the dust a chance to settle.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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