Groupon: Ahead Of Itself, An Investment Trap, Or Both?

| About: Groupon, Inc. (GRPN)

Groupon (NASDAQ:GRPN) is on an absolute tear. Since closing at 10.14 on December 11th, it has risen as high as 11.70 in trading on 12/20/13. This is an increase of roughly 13% and has the stock trading near the consensus 52-week target. I'm thinking it's time to say "Thank You" for the Christmas present and take some money off the table if you are long Groupon, and hold off establishing a position if you are considering the stock.

The Case for Groupon Being Ahead of Itself

As earlier stated, Groupon has a consensus target of 11.82 per Yahoo! Finance, which is just pennies away. The momentum behind Groupon has pushed the stock up rapidly over the past few trading sessions with only one obvious driver. The only event that is driving this gain is one analyst initiating coverage with a favorable recommendation and a price target of $13. But there doesn't seem to be any fundamental changes in the past ten days that would drive the stock to the target and cause it to go higher. Remember, analysts are almost always favorable, and while Mr. Aftahi of Northland Capital Markets is entitled to his opinion this is one analyst report out of 24. Are all of them going to raise their estimates with little change in the underlying business model of Groupon? The only other news of late is Groupon rescinded a stock offer due to a clerical error made on their part, and small announcements regarding a deal in Canada and other incremental business developments. The usual amount of chatter both positive and negative is ongoing. Return on equity and other key statistics are negative and no "game-changer" event has occurred other than one analyst report. My impression is this is a "hot money" trade and likely the only gains in the stock for a few months have now been made.

The Case for Groupon Being an Investment Trap

Groupon does not compete in an exclusive market, nor does Groupon have a compelling niche in any of its core businesses. While fellow SA contributor R. J. Chopin provides a favorable and thorough analysis of Groupon, I differ with his opinion that Groupon becoming synonymous with "deal" is a positive development. Sure the Groupon World Marketplace is a good diversification strategy, but I do not believe Groupon can grow fast enough by stressing cheaper and cheaper prices. At these multiples, the time needed to reap gains would likely mean holding the stock for years.

While Groupon is surviving, they do not make sense at these multiples as an investment and the trade/short-term play is critiqued above. Groupon primarily competes for price-conscience consumers in most cases, nearly guaranteeing a "race to the bottom" mentality that cannot help margins. With a negative profit margin already, where is the turnaround point? The stock also has a forward P/E of 46 based on possibly rosy forecasts. Sure, Groupon continues to develop and possibly even reinvent itself, but why is this compelling to an investor at these prices? Does it become a deep-discount online merchant first and foremost, with the deal-site nature of the company fading? Then it would compete even more with established merchants such as Amazon (NASDAQ:AMZN). Sure, Amazon is also trading at high multiples and near its target price but it has a mature and proven model and the "name brand". As an investor, does either stock have a "moat"-no, but Amazon definitely has greater market penetration.

In Groupon's defense, they do have a large cash position (over $1B) and are getting costs under control. However, I don't think Groupon makes sense as a long-side trade or investment at this price after the run-up it has made in the past five days. Disagree? I look forward to your comments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.