Shares of Groupon (NAS: GRPN) hit a new 52-week low on Thursday. Let's look at how it got here and whether a stormy forecast is in its future.
How it got here
Groupon's growth rate is certainly not what has put the online daily-deal site at a new 52-week low, since it and LivingSocial control about 90% of the daily-deal market. What is responsible for putting Groupon into the proverbial poorhouse has been one malady of accounting errors after another.
Just two months after filing its IPO prospectus, the company's revenue recognition method came under scrutiny by the Securities and Exchange Commission. This kind nudge by the SEC coerced the company into restating its 2010 and 2011 earnings reports, which resulted in a slashing of its 2010 revenue by more than half and almost 60% through the first half of 2011. Then, just 10 days ago, Groupon again noted that because of a lack of ample cash on hand to handle large item refunds, it would need to restate its previous quarters' results, leading to a $14.3 million revenue reduction, a wider-than-expected loss, and now an SEC investigation into its accounting practices. If you tack on that Groupon's business model has a very low barrier to entry, yet high customer acquisition costs, you'll begin to see why this is at a new 52-week low.
How it stacks up
Let's take a look at how Groupon stacks up next to its peers.
Being the only daily-deal site pure play has its disadvantages when customer-acquisition costs are rising.
Price/ Cash Flow
Shares Short as a Percentage of Float
|Amazon.com (NAS: AMZN)||11.4||23||69.6||3%|
|Microsoft (NAS: MSFT)||4.1||9.3||10.5||0.8%|
|Google (NAS: GOOG)||3.5||14.2||12.7||1.5%|
Sources: Morningstar, Yahoo! Finance.
You might think Groupon is in a class of its own, but it's going up against three of tech's biggest giants. Amazon.com has a $175 million stake in LivingSocial, Groupon's primary competitor. Similarly, Microsoft is offering daily deals under its MSN Offers tag name. Search giant Google recently purchased DealMap, which it plans to integrate in with its popular Google Maps platform in addition to its own daily-deals service. Despite being a daily-deal pure play, Groupon is quickly losing what advantages it had over big tech names, and if the amount of short-sellers currently in the stock proves anything, it's that Main Street realizes this as well.
Now for the real question: What's next for Groupon? That question really comes down to whether investors can trust the accounting figures coming from the company and whether it can turn a profit with acquisition costs on the rise.
Our very own CAPS community gives the company a dreaded one-star rating, with an overwhelming 668 of 732 members expecting it to underperform. I, too, am one of those 668 members who have made a CAPScall of underperform on Groupon and am currently up 56 points. I see no reason Groupon's slide should abate until it has solidified its accounting and outlined ways it will remain profitable. As I pointed out the day after Groupon's IPO in November, there are significant problems with Groupon's business model, including its low barrier to entry and just as low customer loyalty that will affect the longevity of its business model. I simply don't see this as a long-term survivor.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Amazon.com, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google and Microsoft, as well as creating a bull call spread position on Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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