The Gist of It
Groupon's (NASDAQ:GRPN) recent rise in stock price should be treated as an opportunity to liquidate or even play the downside.
A Deteriorating Picture
Even with Groupon's stock price falling over 40% this year, valuation is still rich considering the deterioration in financials. Investors have been continually disappointed with Groupon's inability to create positive trends across their bottom line. While the stock price has somewhat reflected the company struggles, a retest of the lows may well be warranted.
The company's primary weaknesses can be seen across multiple areas including a deteriorating net income, weak operating cash flow, and below expectations return on equity.
In their most recent quarter, Groupon suffered a steep decline in earnings per share in comparison to its performance from the same quarter last year. While Groupon slightly beat revenue expectations their outlook remained weak and ultimately sent the shares downward.
In addition to lower earnings, the company's current return on equity is below its ROE for the same quarter one year ago. In fact, Groupon's return on equity significantly trails both the S&P and the industry average. In Q1 2014 Groupon had a return on equity of -15.64 while the industry was at 17.23 and the S&P 500 is at 14.48.
Finally, net operating cash flow plummeted $-20.72 million when compared to the same quarter last year. This translates into a growth rate that is significantly lower to the industry average as well.
Valuation and Trade
Groupon's stock price hit a new all-time low this year at $5.18 per share. Since then, the stock has made feeble rallies to approximately the $6.50 per share level. The most recent rally has been primarily attributed to Groupon's "freebies" offers, as well as, Priceline's (NASDAQ:PCLN) acquisition of Opentable (NASDAQ:OPEN). Should these actually be the catalysts sending shares higher, the quality of the rally should be question. Therefore, investors might consider playing the downside from here. Without a more positive outlook regarding Groupon's core business activities, shares should retest the low of $5.18 per share (see Groupon 3 month chart below).
Shorting the stock price at current levels and placing a target around the 52 week low would still provide investors returns between 15% and 20% gains. Those returns could be greater should investors choose to play in the money put options.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.