Since reaching a year-to-date high of $12.42 back in January, shares of beleaguered deals giant Groupon (NASDAQ:GRPN) have plummeted 45%, reaching a low of $6.85 last week. The stock closed Friday at $7.09, and the shares are down 40% year-to-date. But this has all of the makings of an overreaction. The way I see it; Groupon hasn't done anything deserving of this punishment, at least not to the extent that its results have swayed that drastically from other momentum growth stories.
Recall, in the February quarter, the company did beat earnings estimates by 2 cents, posting adjusted earnings of 4 cents per share. This is while revenue rose slightly above 20% to $768.4 million from the previous year, which beat estimates of $718 million by 7%.
The stock got pummeled because the company issued worse-than-expected first-quarter guidance. While citing plans to spend more to advertise its online marketplace, management projected a loss of 2 cents to 4 cents per share for the current quarter, which was below analyst estimates.
Investors got spooked, to put it mildly, and analysts didn't help matters with their panic. Consider that Groupon's guidance was in accordance with the company trying to execute what analysts believed the company needed to do to remain viable. These steps include international expansion and mobile monetization. But these moves will cost money. Yet, when the company issued the decline in profits due to higher costs, it was seen as "mismanagement." Groupon can't seem to win.
The company will report first-quarter results Tuesday. The street will be looking for a loss of 3 cents per share on revenue of $738.4 million, which would represent a year-over-year revenue increase of 23%. Estimates have come down slightly following weaker-than-expected results from other online/internet companies like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). But there is no fear that either Amazon and eBay are bad businesses. The way I see it Groupon is in select company.
But the company is seen as lacking the ability to create new markets. The concern is that Groupon can only operate and service existing markets, which is true. But Groupon is in no worse shape than it was, say, five years ago. There were always threats that Google (NASDAQ:GOOG), (NASDAQ:GOOGL), which once made a $6 billion bid for Groupon, would develop a platform to kill off the company. That has yet to happen.
There has been talk that Amazon, which owns a stake in rival Living Social, will build up its capabilities to put Groupon out of business. That hasn't happened either. Now the "new threat" is Facebook (NASDAQ:FB). It seems Facebook is a threat to everybody. But the point is, Groupon has posted incredible growth despite these constant fears. And it's time that investors/analysts stop treating this company as anything less than a legitimate business - one that is working to develop/strengthen its global positioning.
Consider, one of the most popularly cited bearish arguments against Groupon is its minority stake in Chinese competitor Life Media Ltd. Analysts have used the phrase "burning through millions of dollars in cash" to describe Groupon's investment in Life Media. When in fact, if we were to adjust out the one-time charge of $85.5 million related to Life Media, Groupon actually earned a profit.
By contrast, Facebook, which has spent billions in various companies that go beyond its core social capabilities, is seen as "thinking outside the box." Groupon is clearly operating under a double standard. As noted, Groupon's management sees Life Media as a way to expand the company's lack of global positioning, which has also been a bearish topic. We can't have it both ways.
It remains to be seen to what extent these shares recover on Tuesday following the results. But I don't expect they will get any worse. To the extent that the company can show a strong number in areas like gross billings, which has grown in North America and in the EMEA region, the stock should do well.
With these shares still down significantly, I would be a buyer here ahead of earnings and bet for another overreaction - this time in the other direction. I would not be surprised to see the stock jump 22% to around $9 right after the announcement if Groupon beats its earnings number and offers better guidance. I project these shares to reach $10 by the second half of the year, which is the median target of the analysts covering the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.