Groupon's Earnings Expectations

| About: Groupon, Inc. (GRPN)

Today, after market close, Groupon (NASDAQ:GRPN) will release its latest quarterly results. After three straight quarters of earnings letdowns, options traders are counting on Groupon shares to surge after the next earnings announcement. Trading in $6 call options, far out of the money, accounted for about 40 percent of the total volume in the company's options on Monday, indicating that investors are looking for a movement of at least 15 percent following the earnings reveal, while also limiting their risk if the company takes a plunge.

Groupon became famous for its popular daily deals, which allowed shoppers to take advantage of huge savings retailers. But a few months after the company's IPO, that niche lost its popularity, forcing the company to revamp and restructure as I discussed in my previous article, entitled 'Does Groupon's Stock Jump Have Cushioning?'. Regardless of worries about the company's future, Groupon's stock has gained 35% in the past 6 months and this earnings announcement will back up the validity of that growth. Further, the stock has been hit with strong volatility, falling 7% over this past weekend.

For this quarter, analysts are expecting an EPS of $0.03, which is down almost 50% for last year's estimate, and a Revenue Estimate of $588.92 million, which is also down-- but only by about 6%. But most importantly, investors are looking for new ventures the company's management plans to take on to increase its infrastructure.

What Investors Are Looking For?

Analysts seem nervous about Groupon's earnings, having reduced their estimates in the past few months. With first-quarter estimates off $0.02 per share and the full-year 2013 consensus down twice that amount, what's surprising is that the stock has managed to post a 4% gain since late January.

Competition from Amazon (NASDAQ:AMZN), LivingSocial and countless other knockoff daily deal offerings like Dans Deals, forced Groupon to turn to reselling overstocked merchandise from manufacturers, a much lower-margin business. Moreover, the company has had difficulty trying to turn to the Chinese market for potential expansion, as Chinese e-commerce Alibaba has asserted its dominance over its home market.

Groupon is also trying to make itself more mobile-friendly by adding search features to its mobile apps. If customers can make purchases more easily, then the improved apps could create some growth avenues for Groupon.

In Groupon's quarterly report, investors will be watching to see whether its efforts to reach out to its network of business customers can bear fruit in bringing new business to the company. Moreover, if projections for the coming quarters falls short of the growth that investors want to see, then the stock could post sharp declines.

Groupon Options Heating Up

Option traders are stacking the deck with short-term bullish bets. In midday trading yesterday, overall call volume was running about four times heavier than usually, with roughly 25,000 options on the tape. Nearly half of this volume has traded at one strike, the weekly 6-strike call, where the 12,000 contracts traded easily trumps existing open interest. A number of mid- to large-sized blocks, 300 to 500 contracts each have gone off at the ask price, and all told, 60% of today's volume at this out-of-the-money strike crossed at the ask, for an overall volume-weighted average price of $0.28.

Implied volatility has shot up more than 61 percentage points to 184.2%, well above Groupon's one-month historical volatility measure of 43.7%. Option traders are wagering on short-term upside for GRPN, and are likely hoping Wednesday's earnings report helps boost the shares.

Break-even at expiration on Friday afternoon is $6.28 or 12.5% above the stock's current price of $5.58. The at-the-money (5.50 strike) straddle expiring this Friday is currently priced at $0.81, or 14.5% of the stock price, meaning, the options market expects a 14.5% move in either direction before Friday's closing bell. Lastly, the option's delta currently stands at 0.38, giving a slightly less than 2-in-5 chance at an in-the-money finish on Friday.

Recent Hit To Its Share Price

Shares of Groupon recently plunged, falling 7% from Friday's close of $5.85 to yesterday's close of $5.39. The fall came after analysts from Piper Jaffray announced that they were expecting the group discount site's revenue outlook for the June quarter to miss estimates. Further, Groupon announced that Faisal Masud, who played a large part in Groupon Goods e-commerce system, was leaving the company to possibly join office supply giant Staples (NASDAQ:SPLS).

Masud's departure was disappointing for investors, since Groupon Goods, its e-commerce arm for discount goods, had been considered one of the company's only remaining bright spots. Masud's departure comes only two months after the company fired its founder and CEO, Andrew Mason.

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.

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Tagged: , Internet Information Providers, Earnings
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