Groupon: What It's Done And What It Will Do

Sep.11.12 | About: Groupon, Inc. (GRPN)

After having what was believed to be a successful IPO, Groupon (NASDAQ:GRPN) shares finally took a nose dive after three months of better than expected success. Shares are now down over 83 percent since the IPO. It turns out that Google's $6 billion offer to Groupon would have been the better option after a series of earnings disappointments, a gaggle of accounting adjustments, and several quarters in the red. With its first profitable quarter now in the rear view mirror and with more profitable quarters expected to follow, is now the time to buy Groupon at under $5?

One of my trading mantras is that if a stock's price has gone down 80 percent in under a year, it can always go down another 80 percent. Groupon is no exception. The company has done a good job staying at the front of the market as Google Offers and Living Social have still not come close to surpassing the daily deals site. Most of its competition has come from a host of companies beefing up their rewards programs. This includes rewards and cash back programs from credit card companies along with customer rewards programs of many restaurants and retailers. They can leverage their already profitable businesses to create deals similar to Groupon's at a cheaper cost to their partner companies. In addition many of Groupon's previous partners have realized they can promote their own deals and not have to pay the hefty 50 percent premium that Groupon usually takes.

Based on analyst estimates, Groupon is expected to have around 30 percent per annum earnings growth over the next five years, along with a 37 cent earnings per share estimate in 2013. At its current price of $4.26, Groupon actually looks like a good value buy right now. This low valuation is by no means an oversight by the market. Many investors expect more accounting mistakes and missed earnings over the next few years. Groupon's revenue was $1.6 billion in 2011 and its expected revenue in 2013 is $2.83. Many Groupon subscribers have already gotten sick of daily deals e-mails that are for the most part useless, so growing the business by that much in such a short time is going to be a giant challenge.

Right now I would put a hold-to-sell recommendation on Groupon. The bubble looks like it's finished bursting for now, but I still do not trust the management or business model enough to make Groupon a part of my portfolio. I would expect shares to fluctuate between $3 and $6 over the next year and I don't believe Groupon's infamous one day swings will become a thing of the past. Shares are simply too volatile for the average investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.