Groupon: Might The Best Deal Be The Coupon On The Company's Own Shares?

| About: Groupon, Inc. (GRPN)

Shares of Groupon (GRPN) lost another 30% of their value on Friday. On Thursday after the market close, the e-commerce market place reported its third quarter results.

Third Quarter Results

Groupon reported third quarter revenues of $568.6 million, up 32.2% on the year. Revenues fell short of the company's own guidance of $580 to $620 million. Analysts expected Groupon to report revenues of $590.1 million.

Worrisome is that revenue growth has stabilized on a quarter-to-quarter basis. Gross billings came in at $1.22 billion over the quarter, up 5% on the year. In constant currencies, revenues were up by 11%. Revenues stopped growing as Groupon aggressively cut marketing expenses to "just" 12% of revenues.

The company reported an operating income of $25.4 million compared to a loss of $0.2 million last year. Operating income came in at the midpoint of the company's own guidance of $15-$35 million. Operating income fell from $46 million in the second quarter.

Net losses narrowed from $54.2 million to $3.0 million, or $0.00 per diluted share after rounding. Analysts expected the company to earn $0.03 for the quarter.

CEO Andrew Mason commented on the results, "Our solid performance in North America was offset by continued challenges in Europe. Groupon Goods has evolved into a second major category that our customers clearly love. With deals on everything from designer sunglasses to big-screen televisions to most-wanted today, we think it will be a great gifting destination this holiday season."

Detailed Information

Groupon had a solid performance in North America. Revenues were up 80.5% to $291.6 million for the quarter, as growth is accelerating compared to the 73.6% growth rate for the first nine months of the year.

International performance was very bad. Revenues rose a mere 3.1% during the quarter to $277.0 million, or 12.7% in constant currencies. To put the growth rate into perspective, revenue growth for the first nine months came in at 51.7%. Furthermore, revenues fell 10% compared to the second quarter.


For the fourth quarter, Groupon guided for revenues of $625 to $675 million. The company expects operating income to come in between zero and $20 million, with stock based compensation expenses estimated at $30 million.

The midpoint of Groupon's revenue guidance beat analysts estimates of $634 million. Non-GAAP operating income which is guided at $30-$50 million fell short of analyst expectations of $62 million.


Groupon ended its third quarter with $1.20 billion in cash and equivalents. The company does not operate with debt for a comfortable net cash position.

For the first nine months of 2012, Groupon reported revenues of $1.70 billion. The company reported a modest net profit of $13.7 million, or $0.02 per diluted share.

After Friday's 30% decline, the market values Groupon at merely $1.8 billion. This values the firm's operating assets at just $600 million. As such, operating assets are valued at merely 0.25 times annual revenues. The company is expected to roughly break even for the year.

Investment Thesis

Year to date, shares of Groupon have lost almost 90%. Shares started the year at $20 and peaked at $24 in February. From that point in time shares kept sliding to a mere $2.76 at the moment.

Groupon aggressively grew its revenues from $313 million in 2010 to an estimated $2.35 billion in 2012. The company reported a net loss of $390 million in 2010 and could break even this year.

Investors who invested at time of the public offering are not too happy, with shares down some 86%. The company has been plagued with accounting worries, angry customers and merchants, a poor performance in Europe, and competition from LivingSocial backed by (AMZN).

To combat the decline in revenue growth Groupon has decided to sell goods as well, expected to generate sales of $500 million per annum. The poor performance in Europe is attributed to poor management and general economic worries. Groupon hopes that by investing in technology, innovation, customer relations and personalized deals, it will be able to revamp the European business.

With shares valued at merely $1.8 billion, operating assets are valued at little over $1 per share if management does not squander its cash balances. Before the public offering, Google (GOOG) offered $6 billion for the operating assets of the firm, implying a valuation of roughly $10 per share.

Just like some of its featured deals. Perhaps the IPO price was too expensive, yet a 86% discount should attract some buyers.

I am a speculative buyer.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GRPN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.