Is Groupon a Money Pit?

With shares of Groupon (NASDAQ:GRPN) trading at around $6.30, is GRPN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

There are many factors to consider when looking at the Groupon situation. We’ll start with the positives, which include:

  • Revenue increase of 31.3 percent last quarter on a year-over-year basis
  • Consistent revenue improvements on annual basis
  • Departure of former CEO Andrew Mason

There might be other positives, but they’re certainly not at the forefront of the story. The list of negatives is longer, which include:

  • Wider loss last quarter on a year-over-year basis
  • Lack of leadership
  • Competition likely to increase due to low barrier to entry
  • Weak margins
  • Most analysts taking a side are bearish
  • Consistent losses on an annual basis
  • High operating costs
  • Weak guidance

Glassdoor.com is good tool to use to take a peek at company culture. If the company culture is good, then there is more potential for production. If the company culture is poor, then there are likely a lot of disgruntled employees, which can lead to a lack of production as well as a high turnover rate. According to Glassdoor.com, employees have rated Groupon a 2.9 of 5, which is about average. Several employees stated that the company culture was better prior to the IPO, which should come as no surprise. Also according to Glassdoor.com, 42 percent of employees would recommend the company to a friend. This is subpar.

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Alexa.com is a good tool for measuring Internet traffic. Since 2011, Groupon’s traffic has declined. At one point, it was ranked higher than #200 for most visited sites in the world. Today, it’s ranked #404. Over the past three months, pageviews have decreased 7.27 percent, but pageviews-per-user has increased 5.1 percent. The bounce rate has decline 3 percent, which is a positive. And time-on-site has increased 4 percent. Those who use Groupon might also use LivingSocial.com, which is partially owned by Amazon.com Inc. (NASDAQ:AMZN). LivingSocial’s traffic rank has also declined since 2011. Currently, it’s ranked #727. Over the past three months, pageviews have decreased 1.16 percent, but pageviews-per-user has increased 1.7 percent. The bounce rate has increased 9 percent, and time-on-site has increased 1 percent. It doesn’t like either Groupon or LivingSocial is running away with the Daily Deal trophy.

Let’s get to some comparative numbers. The chart below compares fundamentals for Groupon, Amazon, and eBay Inc. (NASDAQ:EBAY). Groupon has a market cap of $4.15 billion, Amazon has a market cap of $119.24 billion, and eBay has a market cap of $68.77 billion.

GRPN

AMZN

EBAY

Trailing   P/E

N/A

N/A

26.65

Forward   P/E

21.00

73.34

16.42

Profit   Margin

-2.35%

-0.06%

18.54%

ROE

-7.07%

-0.49%

13.45%

Operating   Cash Flow

$266.83 Million

$4.18 Billion

  $3.84   Billion

Dividend   Yield

N/A

N/A

NA

Short   Position

20.10%

N/A

1.10%

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Groupon is stronger than the industry average of 0.10. The balance sheet is in superb condition. This is the most impressive area for Groupon. It means that Groupon will have time to come up with solutions to current problems if there are difficult times ahead. However, if the company continues to burn through cash, then this situation will change for the worse.

Debt-To-Equity

Cash

Long-Term Debt

GRPN

0.00

$1.21 Billion

$1.12 Million

AMZN

0.54

$11.45 Billion

$4.38 Billion

EBAY

0.22

$9.41 Billion

$4.52 Billion

 

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T = Technicals Are Strong

Groupon has had an awful year, but a strong month. What is most likely to happen next? An opinion will be given in the Conclusion section.

1 Month

Year-To-Date

1 Year

3 Year

GRPN

14.78%

29.42%

-47.76%

N/A

AMZN

1.35%

4.19%

36.79%

83.84%

EBAY

5.81%

3.97%

47.81%

101.40%

 

At $6.30, Groupon is trading above all its averages.

50-Day   SMA

5.69

100-Day   SMA

5.26

200-Day   SMA

5.34

 

E = Earnings Have Been Weak             

Revenue has consistently improved on an annual basis. Earnings have improved over the past two years, but they’re still on the wrong side of the line.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

0.005

14.54

312.94

1.61B

2.33B

Diluted   EPS ($)

-0.01

-0.02

-1.33

-1.03

-0.10

 

When we look at the previous quarter on a year-over-year basis, we see an improvement in revenue and a decline in earnings. This pretty much sums up the Groupon story. Revenue continues to improve, but profits seem difficult to achieve.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

492.16

559.28

568.34

568.55

638.30

Diluted   EPS ($)

-0.02

-0.02

0.04

0.00

-0.12

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

This is a growing industry, but low barriers to entry are going to lead to ever-increasing competition. This is bad news for Groupon, which is much smaller than several companies interesting in getting in on the game.

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Conclusion

Every time it seems as though Groupon is about to drown, it comes up back for air. This resiliency is a good sign, but how resilient would Groupon be in a bear market? We don’t know how the stock would have performed in 2008 and early 2009, but we do know that it has performed poorly this week (despite today’s gain) in a difficult environment. The past several months have been impressive, but prior to that, the stock performed poorly in a bull market. This is almost always a red flag. In addition to that, competition has increased, there is a lack of leadership and direction, guidance is weak, and operating costs are devastating.

Groupon’s upward momentum over the past several months might have potential to continue in the near future, but Groupon is a long-term STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.