Groupon (GRPN) – Is It Time to Step In?

Groupon (GRPN) – Is It Time to Step In?

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We thought this is a good time to re-fresh our thoughts on Groupon (GRPN). They’ve been on the tape for the last few months and they report Q2-2012 earnings on August 13th.

Lets summarize:

In the U.K., the Advertising Standards Authority got involved with the Office of Fair Trading (or OFT) and launched a formal investigation that found Groupon in “widespread” breach of consumer protection regulations. The Middle East arm has been the focus of attention and changed leadership twice.

In a statement released by the ASA, the agency said it was referring Groupon over three specific concerns: “failure to conduct promotions fairly, such as not making clear significant terms and conditions,” “failure to provide evidence that offers are available,” and “exaggeration of savings claims.”  The saga doesn’t end here. The Customer Services Scoreboard on the GRPN site is full of complaints, some of which not very pleasant like “I’m totally disgusted.”

In April, Groupon settled a lawsuit over the expiration dates of its Groupons. GRPN has now changed its expiration policy so that Groupons never expire. Does this mean an increase of revenue accruals?

To add to the injury there was news out today that the Waffle Man held GRPN responsible for the loss of his business.

Is Groupon living up to its promise stated on their website “If the experience using your Groupon ever lets you down, we”ll make it right or return your purchase. Simple as that.”?

Business Section:

We wanted to take the opportunity to look beyond the bad press and focus on the fundamentals.

We describe Groupons peer group to include LinkedIN (LNKD), HomeAway (AWAY), Amazon (AMZN), eBay (EBAY), Opentable (OPEN), and Zynga (ZNGA). On June 1, 2012 the company-wide IPO lockup expired, allowing 600mm shares to be freely traded (220mm from management, 330mm from institutional private investors and 50mm from smaller private investors). Given that the current price is a lot lower than where the stock traded before the lock-up period, we suspect large amount of insider selling. This might lead to the continued bleeding of the stock.  Since the IPO the stock has been down 65%, hence in short, we think Groupon stock is worth the look pre-earnings.

In terms of valuation, the stock currently trades at 10x the 2013 Consensus estimate of $0.70. This is versus 20x the peer group of Internet advertising companies.

Catalysts going forward: 1) The company reports Q2-2012 earnings on August 13th for which the consensus revenue is $578 million and an EPS of $0.02, 2) Volatility in the social media space added due to the recent uncertainty of the facebook IPO, 3) Impact from the recent lawsuits described in more detail above, 4) Continued Merchant saturation, and 5) Possible higher refund accruals due to the non-expiration of the groupons.

Compare average analyst ratings for the companies listed below using Kapitall's Compar-O-Matic.

 

Here's are links to more information on Groupon and its industry peers to aid you in research: 

1. Groupon (GRPN, Earnings, Analysts, Financials): Groupon, Inc. operates a shopping website that shares information on local goods, services, and cultural events for businesses and consumers across the World. The Company provides information on attractions to see, do, eat and shop.

 

2. LinkedIN (LNKD, Earnings, Analysts, Financials): Operates an online professional network

 

 

3. Zynga (ZNGA, Earnings, Analysts, Financials): Zynga Inc. operates as a social gaming company. The Company offers games and support on social networking sites, cellular devices, and internet forums.

 

 

4. Amazon (AMZN, Earnings, Analysts, Financials): Operates as an online retailer in North America and internationally.

 

 

5. eBay (EBAY, Earnings, Analysts, Financials): Provides online marketplaces for the sale of goods and services, as well as other online commerce, platforms, and online payment solutions to individuals and businesses in the United States and internationally

 

6. Home Away (AWAY, Earnings, Analysts, Financials): Operates an online marketplace for the vacation rental industry

 

 

7. Opentable (OPEN, Earnings, Analysts, Financials): Provides restaurant reservation solutions in the united States, Canada, Mexico, Europe, and Asia

 

 

 

Written by Sabina Bhatia

 

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One Response to “Groupon (GRPN) – Is It Time to Step In?”

  1. I'm staying away from Groupon. Too many unknowns with their accounting department and I their business model has too many unknowns.

    Disclosure: I do not own Groupon. I have participated in Groupon offers.

    David Neubert is Cofounder and shareholder of Kapitall, Inc., the sole owner of Kapitall Generation, LLC (“KapGen”), an SEC registered broker-dealer and FINRA member. Mr. Neubert is not an associated person of KapGen or any other broker-dealer and, other than his indirect relationship described above, he has no control or affiliation with KapGen.

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