Groupon Becomes Its Own Best Deal For Google Or Facebook

May. 7.14 | About: Groupon, Inc. (GRPN)

Summary

Several years ago, Google made a $6-billion bid for Groupon.

With Groupon now 23% cheaper than Google's initial offer price, I wouldn't rule out the possibility of Google coming back to the table with an offer.

Groupon just became its own best deal.

Groupon (NASDAQ:GRPN) shares are still under pressure ever since the stock reached a year-to-date high of $12.42 in January. With Tuesday's close of $6.72, Groupon has lost close to 50% of its value since it peaked. Shares are down 42% year-to-date.

Investors are stuck wondering if Groupon's recent decline suddenly makes the stock "a great deal", or is this a falling-knife situation. But the more pressing question should be, has Groupon done anything to deserve this punishment? And following the company's first-quarter earnings report and disappointing guidance, it doesn't seem as if this bleeding is going to stop anytime soon.

First and foremost, I don't believe Groupon's earnings report, which included a beat on revenue and profits, revealed the sort of fundamental problems that would justify this level of punishment. The Street just didn't like what management had to say about the next quarter.

But recall, this is exactly where we were back in January, after the stock peaked at $12.42. In the February quarter, the company also 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%. So Groupon's fourth-quarter report was even stronger.

But the stock plummeted after management (then) issued weaker-than-expected first-quarter guidance - the same report Groupon just beat. So it seems this cycle is going to continue until Groupon decides it's going to issue better confidence. Let's go through the numbers.

First-quarter revenue rose 26% year-over-year to $757.6 million, topping last year's mark of $601.4 million. North America revenue increased 27%, EMEA increased 26% and Rest of World increased 23%. Recall, analysts had been modeling $740 million. And given the weaker-than-expected results that has come out from other online/internet companies like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), Groupon's numbers stand out.

The strong revenue results yielded a net loss per share of a penny, excluding some costs. The Street was looking for a loss of 3 cents. But despite the constant fears of competitive threats from the likes of Google (GOOG, GOOGL) and Amazon, that Groupon was able to raise its gross billings 29% is nothing short of impressive.

Gross billings, which grew to $1.82 billion, is the metric that reflects the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds. In the North Americas, gross billion grew 15%, while the EMEA increased 4% and Rest of World increased 123%. Management attributed the growth to the acquisition of Ticket Monster.

All told, the company posted a 2% increase in gross profit, which reached $385.7 million. In terms of guidance for the current quarter, the company projects revenue to come in the range of $725 million to $775 million, which falls in line with Street estimates of $758 million. Analysts didn't like the earnings-per-share forecast, which calls for break-even. The Street was looking for a 3-cent profit.

Here again, Groupon's guidance seems in accordance with the company trying to execute what analysts believed the company must do to remain viable, including spending to grow its international footprint. Not to mention, developing capabilities to monetization mobile. But these moves aren't cheap, which is what is presumed in the break-even earnings projection. So the notion that Groupon is this terrible business with no future seems contradictory to what these numbers represent.

With these shares still down significantly, Groupon becomes a possible acquisition target for Facebook (NASDAQ:FB), which has made it clear that it wanted to get into the deals business as a way to grow more advertising. Recall, several years ago, Google made a $6-billion bid for Groupon. So with Groupon now 23% cheaper than Google's initial offer price, I wouldn't rule out the possibility of Google coming back to the table with an offer. Groupon just became its own best deal.

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.