Is Groupon At The End Of Its Descent?

| About: Groupon, Inc. (GRPN)

Groupon (GRPN) shares closed at $24.58 at the close of February 8th trading. At the close of April 17th, the share price dropped to $12.58, down 48.8 percent. During this time, we have seen Groupon miss earnings and then have to restate earnings, but the vast majority of the drop came from a consistent bearish influence during a time where the Nasdaq was up 4.34 percent. In this article, I explain why I think Groupon's bear run may end for now, but investors should still be wary going forward.

Groupon has been tagged as "the fastest growing company ever." The company reported $1.61 billion in revenue in 2011, which is a 952.4 percent annualized increase over its 2009 revenue. However, many critics, including myself, believe that Groupon IPO'd at way too high of a valuation because of its lack of earnings, potential competition, and sketchy accounting.

Groupon has never reported a profitable quarter, but that is supposed to change soon. Analysts expect Groupon to report earnings per share of $0.01 in the first quarter of 2012, and if there is another miss, the company should be profitable in quarter two with expected earnings per share of $0.04. Groupon is expected to be a fairly profitable company by 2013 with expected annual EPS of $0.77. If its $12.58 share price stays constant, that would give Groupon a P/E ratio of 16.34, which is fairly reasonable.

What has turned off investors as of late is that the prospect of Groupon meeting its expectations is turning into a very big "if." Groupon is already the largest daily deals site in almost every developed country on Earth, so how is it going to make $3.01 billion in revenue in 2013 if it only made $1.61 billion in 2011? It is very likely that Groupon, or daily deals as a whole, may just be a passing trend and we're looking at the company's peak.

The reason why I believe Groupon will stop its bear run for the time being is two-fold. First, the stock price has come down to Earth and its expected future earnings better support its current stock price. Second, I believe the peak of tech bubble 2.0 is yet to come and upcoming events like the Facebook (FB) IPO may cause all of the tech darlings' shares to be bullish. Groupon is a bargain compared with the $1 billion purchase of Instagram. However, a lot rides on its May 14th earnings call. Investors will want to see black numbers, and a quarterly loss could send the stock plummeting.

Today I came across a Kozmo.com reference and the company reminded me so much of Groupon's short history. Kozmo.com was founded in 1998 and was liquidated in 2001. In 1999, the company lost $26.3 million on $3.5 million in revenue. In this same year, it raised $250 million from investors, including a $60 million investment from Amazon (AMZN). Although Groupon's business model is much more far reaching and much closer to being a successful company, it was a harsh reminder of how dot coms that show a lot of potential can come crashing down. I recommend not going long on shares right now, but it is also a good time to ease off of short positions, as I believe that Groupon has finished its bleeding, for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.