As the father of modern fundamental analysis, Columbia Professor Benjamin Graham outlined in the Securities Analysis (with David Dodd) and The Intelligent Investor, the valuation of a corporation begins with its intrinsic value: the value of the company as it is determined by the value of its asset, management, and prospects, most notably, the stream of earnings it is expected to generate-the source of cash flow, retained earnings, and dividends that enhance shareholder value
Graham emphasized that a company's intrinsic value may or may not be equal to its market value: the value Mr. Market -- to use their metaphor -- assigns to the company on a trading day, especially at times when Mr. Market decides with emotions rather than reason. A euphoric Mr. Market, for instance, may be valuing a company well above its intrinsic value, while a fearful Mr. Market may be valuing the same company way below its intrinsic value. What is the case with Groupon (NASDAQ:GRPN), which delivered another dissapointing report to investors?
Mr. market is euphoric, as the stock's market value exceeds the company's enterprise value by more than ten percent. What does it mean for investors? That they have been overpaying for the stock, perhaps, hyped by the controversy surrounding web-based business and the prospect of an impeding acquisition of the company by Google (NASDAQ:GOOG) or Facebook (NASDAQ:FB).
Quarterly Earnings Growth
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What makes me nervous about Groupon's stock is shrinking profit margins on new business lines, especially overseas, which make future earnings and revenue growth unsustainable. That's why I will stay away from the stock.
Disclosure: I am long FB. 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.