- Groupon's short interest is sky-high, and short sellers are the smart money.
- Option traders are betting on a 19% price move following the release.
- The online coupon cutter should report a profit, but I'm remain skeptical.
Background: Groupon, Inc. (NASDAQ:GRPN) operates as a local commerce marketplace selling coupons and offering products for sale. The market cap is $4.4 billion, and on any given day the company trades about 15 million shares.
Groupon is forecast to record lower second-quarter earnings after the market closes on August 5, 2014. The consensus estimate is currently a profit of 1 cent a share, a drop of 1 cent from 2 cents during the equivalent quarter last year. Revenue is expected to expand about $24 million sequentially and over $155 million during the same period last year to reach $762 million.
I've read estimates ranging from a loss of 3 cents to as high as a profit of 3 cents per share. So that tells you how much consensus there is.
The whisper numbers I have examined start at 1 cent and go up to 6 cents. As large of a year-over-year gain analysts are predicting, Groupon will still need to beat and guide higher to push the share price materially higher.
Compared to Groupon's 25.9 forward price-to-earnings ratio, Facebook's (NASDAQ:FB) has a P/E of 35.97. I have a neutral stance with Facebook (up from my Sell opinion at the IPO), but remain bearish on Groupon.
I made a purchase (bought a bulk pack of batteries because with three young sons, we use a lot of them) that included AA and AAA. Each type arrived via UPS (NYSE:UPS) quickly, but shipped on the same day, albeit in separate packages. Because they weren't shipped together, the effective shipping cost was about double.
As a customer, I don't care, but from an investor point of view, I want to know if that's standard, or if my order was a unique situation.
Yahoo! Finance (NASDAQ:YHOO) states Groupon has a Beta of 0.67. I'm having a hard time getting my head wrapped around such a small number for a stock that appears to move with considerable volatility. I think its number is incorrect, or at least misleading from a practical point of view.
Beta describes volatility for a stock. The lower the number, the less historical amount of volatility the shares have demonstrated. 1 is the market average, 2 is double and 0.5 is half the average.
Shareholders have not been rewarded for their patience; shares have fallen a crushing 27% in the last year. All while other investors have enjoyed significant appreciation in the overall market. If a rising tide lifts all boats, one has to wonder what a falling market will do to Groupon.
The average analyst target price for Groupon is $8.58. If the company can deliver, and continue to deliver, that's a reachable goal. Otherwise, business as usual isn't going to get there in my opinion.
I check option pricing on calls and puts to know what the market is expecting after-earnings price range. The higher the premium, the more investors are bracing for a major price move (not limited to earnings, implied volatility always measures expected price change within a given time frame). You want to examine the next expiration date after the earnings release and maybe one later date.
Based on current option premium, investors and traders are wagering on a 19%, or about $1.24 move in the next 7 days.
That means, as a shareholder or potential investor, you should anticipate Groupon to trade as low as $5.23, or appreciate higher to $7.71, and still remain within one standard deviation. If you're not already prepared for such a broad move (and there's no guarantee it won't move beyond the expected range), you want to make the necessary adjustments.
After last quarter's results, the shares decreased an incredible 22.6%, or $1.56 from the close before earnings release to the closing after. The final price preceding the report was $6.89, and concluded at $5.33 the next trading session.
Groupon shares dropped a humble 6.1% from the closing before last quarter's release until now. That means, based on last quarter's results, and the current option premium charged, as expensive as the options are, it's more advantageous to BUY premium instead of selling it.
Of course, it's akin to driving by using the rear-view mirror, and the implied volatility is sky high for the expiration date immediately after the report. My preference is to sell premium unless it's a day trade or a special situation (if I want to short a stock that I can't find borrows).
The short interest is anything, but short. The number of shares shorted is markedly elevated and should be treated as warning that shorts anticipate continued price weakness. The current float short is 19.4%.