Groupon (GRPN) closed at an all-time low of $2.76 on Friday November 9th trading after disappointing 3Q 2012 results. In opening trade on Monday November 12th the share price hovered around that price, even sliding a little bit more. Market expectations of 3Q revenue of $591 million were disappointing as Groupon's revenues came in lower at $568 million, below Groupon's own forecasted range of $580 to $620 million range. This translated into losses of $3 million for the quarter and breaking even on a per-share basis, with a 29% decrease in Groupon's share value on Friday from an opening price of over $3 the same day. The net loss, reversing positive operating income, was due to stock compensation and expenses related to acquisitions of more than $25 million. Groupon's revenue forecast for 4Q 2012 was not very encouraging either, with a range of $625 million to $675 million, while analysts were forecasting revenues of $635 million.
Among second tier technology start-ups Groupon was once, perhaps, the most promising. It, along with companies such as China's Baidex and Russia's Yandu, as well as Zynga, were some of the most promising. Now, we're seeing Groupon's faults more clearly - an easily copied business plan and poor future planning.
When Groupon went public in November of 2011 its share price was $20 and it reached an all-time high of $26. Since then, it has fallen by more than 86%, a precipitous fall by any measure. What happened to Groupon for it to fall so far so fast? Especially for internet start-ups the expectations for growth are very high; it is certainly a matter of grow very fast or die. In this case, even though Groupon is just about breaking even and arguably on the cusp of being profitable, its growth has slowed down dramatically.
In 3Q 2011 Groupon had operating income. Growth in the next two quarters was significant, going from $492m in the 4Q of 2011 to $559m in 1Q of 2012, making for percentage increases of, respectively, a little over 14% and less than 14%. Since then it has flat-lined. In 2Q 2012 it grew to $568m for an increase of less than 2%, and stayed virtually the same in 3Q 2012 at $569m.
In the same period, its operating income has gone from being essentially zero in the 3Q of 2011, to a $15 million loss in the next quarter, to positive in the next three quarters. Operating income grew to $40 million in 1Q of 2012 and to $46 million in the next quarter, but then plunged to $25 million in 3Q 2012.
A big part of Groupon's strategy has been expansion overseas. This expansion so far, though, has been confined pretty much to operating income. After a promising start, revenue from overseas operations has fallen in absolute terms. Revenue in Europe went from $269 million in 3Q 2011 to $313 million in the next quarter and to a high of $321 million in 1Q 2012. From then on, revenue in Europe has decreased to $308 million in 2Q 2012 and to $277 million in 3Q 2012, almost falling to the level of a year ago. Groupon's performance in Europe has been largely to blame for its dramatic slowdown in overall revenue since the North American market exhibited reasonable growth throughout this period.
operating income exhibited a similar pattern. It went from a loss of $21 million in 3Q 2011 to essentially breaking even in the next quarter to a positive operating margin of $28 million in 1Q 2012. In the next quarter though it remained virtually the same, and in 3Q 2012, it fell to $11 million. Operating income in North America improved significantly at the start of 2012 over 2011, but then stalled and even registered a small decrease by the third quarter of 2012.
This slowdown in revenue growth, and decrease in absolute terms in Europe, is paralleled and probably caused by a slowdown in operating income. From 28.9 million customers in 3Q 2011 Groupon went to 33.7 million in 4Q 2012 and to 36.9 million in the first quarter of 2012. In percentage terms this meant an increase of more than 16% from the fourth to the third quarters of 2011, and an increase of more than 9% from the first quarter of 2012 over the last quarter of 2011. From then on though, active customers have not increased by much, going to 38 million in 2Q 2012 and 39.5 million in the next quarter, for a percentage increase of only 8% over the last two quarters.
Groupon has tried to diversify into direct sales online. In effect, it has increased its Groupon Goods line of business from 3% a year ago to more than a quarter of sales, but has not matched the profits generated by its online discount business. Groupon has also tried to diversify into mobile-payment applications to small businesses and through acquisitions of start-ups like Savored.
Going forward Groupon will have to contend with difficult challenges. Europe is still mired in its sovereign debt crisis with virtually no growth expected in the near future, and a considerable down side risk that things will get a lot worse. There are new entrants to the same market Groupon is in, such as Living Social part-owned by Amazon (AMZN), as well as Google (GOOG). Groupon also has accounting issues with the SEC having to do with its refund policies. Even more worrying for its business model is the question of discount fatigue. Unless, and until, it can be seen to address some of these threats, Groupon is full of holes and not worth the worry for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.