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Summary

  • Groupon missed the street expectations, but the current price already reflects this.
  • Even so, it is still a buy and hold based on its current valuation.
  • With a little luck, Groupon can easily double in the next 12-18 months, which is more than I can say for many other stocks in the social space.

Groupon's (NASDAQ:GRPN) latest quarter was not exactly bad, simply not what the market expected. For the second quarter of 2014, the company announced $1.82 billion in billings, revenue of $751 million, adjusted EBITDA of $59.1 million and non-GAAP earnings of $0.01 per share.

While 23% in revenue growth is not bad, the market was modeling $761 million in revenue. Also, what really spooked the market was third quarter guidance. The company's guidance calls for revenue between $720 million to $770 million, with EPS guidance flat to $0.02 per share, when the consensus was $769 million in revenue and an after tax profit of 0.03 a share. So obviously the street had something to be bearish about.

However, given the valuation of Groupon, the company's quarterly miss is more than backed in the current valuation. In fact, even if Groupon lost money, it still remains one of the cheapest, if not the cheapest stock in the social space. Let me explain why.

One of the best ways to win in this game over the long term, is to try to buy low and sell high. But buying low and selling high is relative. Do you buy a low stock priced or a low valuation stock?

In Groupon's case, I think investors should focus on the low valuation. The question is, how do we determine a low valuation? In Groupon's case, I prefer the Price/Sales metric.

Currently the consensus is that Groupon will book $3.2 billion in revenue for 2014 and about $3.65 billion for 2015. So growth is projected to be about 10% for next year, which for a social stock is poor, but one has to put that in perspective and look at what you pay for the stock today.

If we look at Groupon's current valuation, the stock trades at a Price/Sales ratio of about 1.25 for 2014 and 1.1 times revenue for 2015.

Now let's look at two other similar stocks in the space -- Yelp (NYSE:YELP) and RetailMeNot (NASDAQ:SALE) -- and what their valuation is on a Price/Sales basis.

Price/Sales

trailing

Price/Sales

2014

Price/Sales

2015

1y Target Est

Groupon

1.39

1.25

1.1

7.22

Yelp

16.6

13

9

90

Sale

3.75

3.4

2.86

35

(Data based on analyst consensus estimates from yahoo.com)

Granted this is not an apples-to-apples comparison, however these companies have a lot of similarities and yet they are valued so differently.

Groupon currently trades at an estimated 2015 Price/Sales ratio of 1.1. This is about as low as they come in the entire social space, including many other stocks not mentioned above.

What does such a low Price/Sales ratio mean?

For one thing, it means that Groupon has limited downside, even in the event that it misses street expectations in the future.

The second thing it means is that there is a lot of upside potential to the stock, if in the future higher growth is reignited.

Yelp for example currently trades at 16 time sales. I am sorry, but this is just about as good as it gets for any stock. Groupon can miss again and again and it might not mean much for the stock. If Yelp misses, you better watch out below, because there is a very big difference between a Price/Sales ratio of 16 and 1.

Bottom line

While Groupon missed street expectations for the quarter, the truth of the matter is that its revenue miss is already reflected in the stock price today.

The low Price/Sales ratio also means the stock has a very good cushion, if in the future things don't turn out so good.

Finally, the way to make money in this game is to buy low and sell high. Groupon can, with a little luck, easily double over the next twelve months, based on its low Price/Sales ratio. While many other stocks are growing faster, I can't say the same for many other stocks in the space.

Source: Don't Count Groupon Out Just Yet