Why I'm Buying The Biggest Loser: Groupon

 |  About: Groupon, Inc. (GRPN)
by: Richard Tarjeft

Sticking to my mold of contrarian trading I couldn't help but notice the sea of red surrounding Groupon shares (NASDAQ:GRPN) following yet another disappointing quarter. As it was trading down almost 24% for the day, I started digging for opportunity.

Dissecting what was said in the report was easy. Substantial revenue growth, almost 30% year-over-year, followed by substantial earnings disappointment $-0.12 per share versus $-0.02 per share a year ago. The street was not happy with this and did what the street has done so often with Groupon: Handed it a nice kick in the mouth.

Now it can be easy to demand fast and substantial results from a publicly-traded company. However what people fail to remember is that Groupon is essentially a start-up and to grow a start-up it takes money to make money, i.e. capital expenses should go up as you are initially growing and capturing more market share. Eventually existing customers become the biggest segment of your business growth and the portion of revenue used to grow your business non-organically goes down.

With a company like Groupon, which is trading with a market cap just barely above one year's current revenue, and a multi-billion dollar footprint, it's easy to understand why almost 15.5% of the total shares outstanding traded hands yesterday and there was still strong support for that 103 million shares between $4.50 and $4.80. It was only a little over a year ago when the good people of Google (NASDAQ:GOOG) offered $5.75-$6 billion dollars to buy the company. A time when Groupon had less users and less revenue than it has today. That offer was pre-IPO but it placed an equivalent value on Groupon of around $9.15 per share. It was also reported that potentially the company would have sold for a number between $7.5 billion and $8 billion dollars. Let's go with the lower and assume that means a number of potentially $11.44 per share. I can't say for sure that selling the company is still a consideration for the board of Groupon but let's assume it was to entertain an offer. I would surmise it would be one closer to the number or exceeding that of the one it might have taken back in 2011.

In addition, after the market closed yesterday, current CEO Andrew Mason was fired by the Board of Directors. A move Wall Street seemed to like as Groupon recovered around 7% in after-hours trading.

The technical side of things looked very good for Groupon on the massive volume that traded hands yesterday. There was good support for the stock between $4.50 and $4.80. Institutional ownership is at 58% currently and Groupon, as it sits today, is a big traders' stock. So I would expect a lot of action in the security going forward over the next week.

All-in-all, I think Groupon has a sustainable business. I think revenue continues to grow for as long as it provides value to the consumer. I think the right person at the top can get costs in line with expectations and or exceed them and I would not be at all surprised to see another offer to buy out the brand. Amazon (NASDAQ:AMZN) is attempting to grow in the space, eBay (NASDAQ:EBAY) could make a good fit and I'm sure the people at Google have not forgotten the value they placed on Groupon's highly valuable consumer database. I think any of the three could make a great marriage to Groupon and quickly turn their talent, expertise and resources into a profit with Groupon's model and consumers. Now that egos may have been checked, it seems like the possibility for a mutually beneficial deal still exists.

However, even if that day never comes, Groupon clearly knows how to generate revenue, if it gets costs in line and keeps the consumer coming back for more, it will thrive in the coming years.

Therefore it's my belief that Groupon is the deal we are getting half off on and should take full advantage while it's still on the table.

Disclosure: I am long GRPN. 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.