Groupon Bull Turns Bearish On Decline In Gross Profit

| About: Groupon, Inc. (GRPN)

I owned and liked Groupon (NASDAQ:GRPN) based on its growth rates and cash flow. The growth and cash flow are now both gone and I have sold my position based on the latest earnings report. The euphoria of CEO Andrew Mason's departure is a good time to fold my cards. The future is uncertain and there are better places to put my money.

Groupon is fundamentally a different company than one year ago. From a daily deals company focusing on services and local merchants it is transitioning to a goods liquidator. With all the hype in its press release about Q4 2012 results - 24% increase in gross billings and 30% increase in gross revenues year/year, it is hard to tell what is really going on with Groupon. Let's look at this excerpt from the Statement of Operations:

Three Months Ended December 31,
2012 2011
Third party and other revenue 413,127 478,510
Direct revenue 225,175 13,654
Total revenue 638,302 492,164
Cost of revenue:
Third party and other revenue 63,905 86,882
Direct revenue 218,567 9,383
Total cost of revenue 282,472 96,265
Gross Profit 355,830 395,899

Note that third party revenue has declined somewhat and direct revenue is galloping. I am willing to give a growth business some slack on net income since it may be investing for growth. But higher revenues should still lead to a higher gross profit if the business was fundamentally sound. However, even without looking at its expenses we see that despite the revenue growth in both 3rd party and direct revenue yr/yr total Gross Profit actually declined from Q4 2011. Once we take all the noise out about problems in Europe and the focus on gross billings and persistent deals - Groupon is a declining business barely one year after its IPO.

In Q4 2011, the quarter the company went public it had $492 million in revenue at a Gross Profit of $395 million. Now it has shifted revenue to direct revenue and increased its revenue by Q4 2012. A year later, its Gross Profit is now only $355 million. This means it is losing profitability in its non-goods daily deals business faster than it is adding profit in its direct revenue business. The Groupon model, based on merchant funded cash flows and high gross margins, is not working.

It is quite possible that the stock may rally from here and Groupon may find a business model that works but at this point I would rather sit out and wait. As I pointed out here, Facebook (NASDAQ:FB) is showing the exact opposite trends where its business model is accelerating. It's a better opportunity for my money.

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.