While the social stock craze is still in full force, Twitter's (TWTR) quarterly report is a stark reminder that not everything in the social space is rosy. Because when investors pay a huge multiple for a stock, they expect everything to be perfect. "Not only should Caesar's wife be trustworthy, she also needs to be above suspicion," said Julius Caesar some two thousand years ago.
In Twitter's case, even though the company beat analyst expectations, shares tanked by 12%, partly because Twitter said it only had 241 million monthly active users at the end of the quarter. And that's something the market did not take kindly, because the company only gained nine million new users since its last quarter, when it registered 232 million monthly active users.
I mean I could make a case for not buying Twitter, as I have (Stocks You Should Not Own For 2014), but I think this market does not care one bit about earnings or other fundamental metrics as I am aware of them. The only thing this market recognizes -- and cares about -- is revenue growth and user growth. If you can't bring home both, then you get the axe (for 1-2 days that is until everyone forgets about the incident).
LinkedIn (LNKD) is another stock that met expectations, but fell short in future revenue guidance. In LinkedIn's case, the market has so fine-tuned the price of the stock to its future expectations (future revenue), that when there is a slight deviation, then the market re-prices the stock. In LinkedIn's case, the repricing still has a long way to go if you ask me.
Now let's talk about Groupon (GRPN). Groupon will report on February 20. Groupon has disappointed several times over the past year and its revenue has been stagnant, but the market has been giving the benefit of a doubt to the new management. However, the benefit of a doubt only goes so far if Groupon is not able to bring home the revenue bacon. Because as far as EPS is concerned, no one is really expecting much.
Groupon is expected to make $0.09 per share this year and $0.25 for 2014. The current trailing P/E is about 100 and the future 12 month forward P/E is about 40. So the stock is not at $11 a share because of the earnings picture. My hunch is that the market is betting on a revenue growth surprise figure.
So while the reported non-GAAP EPS will be important, even more important will be if the company can surprise the market with better than expected revenue for the quarter, and hopefully, better revenue guidance than what the market is already expecting. For 2013, the market is modeling $2.53 billion in revenue and $2.9 billion for 2014.
My hunch is that it should not be very difficult for the company to surprise the market in the current quarter as far as revenue is concerned. The company is experimenting with Flash-sales and Online travel bookings, and it has also started a service called Groupon Reserve that lets users reserve a table at a restaurant for free and offers up to 40 percent off the total bill.
So the company is actually doing stuff, even though revenue has been flat over the past year, because the coupon business has no barriers to entry and competition is intense.
So should you buy Groupon at these prices?
I believe the answer has a lot to do with future revenue guidance. If management can give the market something slightly better than what it already expects -- even if the current quarter is not that rosy -- I think the stock can go higher.
In addition, there is one minor detail that might save the stock, even if it does miss the current quarter and even if guidance does not surprise.
Contrary to Twitter and LinkedIn that trade at a stratospheric Price/Sales ratio (LinkedIn at 19 and Twitter at 14 based on 2014 revenue guidance), Groupon's Price/Sales ratio is about 2.5 trailing. Now that's not a low number in my book, but it's a much smaller number than many other stocks out there.
And the higher the Price/Sales ratio, the more sensitive a stock is to a revenue miss or to lower guidance. So because Groupon has a relatively low Price/Sales ratio, unless it misses big time on the revenue front, the chance of the stock correcting is small.
Don't get me wrong, there are a lot of things that I don't like about the company, especially the fact that it can't make any money because of its very high SG&A expenses. However, seeing how this market is behaving and how it totally ignores bottom line EPS in the social space, the market might ignore a miss in EPS, as long as revenue is guided higher.
So if revenue for the current quarter comes in a little better than expected, and future revenue guidance is also just a little better than expectations, then I really think Groupon can go higher, even if I really don't think it deserves so.