Daily Deals Gone Wrong

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I can't say that I was surprised when I learned that Groupon's (NASDAQ: GRPN) chief executive, Andrew Mason, was ousted by the company's board of directors. He is being replaced on an interim basis by Eric Lefkofsky and Ted Leonis, the company's executive chairman and vice chairman, respectively, as an executive search gets underway.

What's done is done and the missteps that have been made under Mason's tenure, which in hindsight places a spotlight on the $6 billion takeover offer presented by Google (NASDAQ: GOOG) in 2010 that Groupon rejected, cannot be undone. Whoever takes the top spot at this daily deals business better be a rainmaker as he or she will influence Groupon's fate and whether or not this stock will once again offer investors any value. 

Writing on the wall

The day before Mason's departure was announced, Groupon reported its fourth quarter and fiscal year 2012 earnings results. The company still isn't profitable, as its fourth quarter operating loss was $12.9 million, which compares to a quarterly loss of $15 million in the same period a year ago. 

The good news: Gross billings, which represent the dollar value of customer purchases, rose 24% in the fourth quarter to $1.5 billion. Revenues climbed 30% to $683.3 million, compared with $492.2 million in the same quarter a year ago. For the full year, Groupon was profitable and reported operating income of $98.7 million, compared with a loss of $233.4 million in 2011. 

The bad news: In terms of 2013 guidance, the online coupon provider expects first quarter revenue of between $560 million and $610 million, which not only pales in comparison to fourth quarter results but is also below consensus estimates of $647 million. Also in the first quarter, the company might either swing to a profit of as much as $10 million or report another quarterly loss. A bright spot is that for 2013, Groupon predicts improved operating income compared with 2012. 

What's alarming is that cash flow dropped significantly: 2012 operating cash flow fell 8% to $266.8 million while free cash flow dropped 31% last year to $171 million. 

Considering the transition that the company is undergoing, I would be surprised if Groupon reports a first quarter profit. The stock is up almost 3% year-to-date and it's trading more than 70% below its 52-week high. 

A Meg Whitman type

Groupon said in its S-1 filing that the company's growth could be impaired if it lost a key member, including Mason. Now that Mason has departed, I don't think it could get any worse. In a best case scenario, the stock could become a turnaround story if the board chooses the right successor. It's too bad that Meg Whitman, Hewlett Packard's chief executive, isn't available because her experience would have made her a perfect fit. Groupon needs a Meg Whitman type who can successfully do what Mason could not -- expand the company's footprint beyond the online coupon market and into product sales of its own where it doesn't have to share revenues with its clients. 

If Groupon finds the right leader for this e-commerce play and can return the company to steady profitability, expansion, and provide shareholder value, it could become a stock worth buying. What happens in the coming weeks and months is critical to this determination. I wouldn't be a buyer just yet. 

 

Competitive landscape

Meanwhile, it's good times over at Google as shares recently surpassed the $822 price level, which set a record high. Google's $270 billion market capitalization clearly trumps that of Groupon, which has a market cap of about $3.5 billion. 

Google is, however, facing increased advertising competition from Facebook (NASDAQ: FB), which recently turned up the heat when it acquired the online ad business Atlas from Microsoft. Google further solidified its dominance in the online ad space with its acquisition of DoubleClick in 2008 but that doesn't mean it can't lose market share.

Incidentally, when it comes to the U.S. advertising market, the two behemoths aren't too far apart. According to eMarketer data cited in Bloomberg, Google, which on the hardware side acquired Motorola Mobility in August 2012, is expected to enjoy 18% U.S. online display ad market share this year compared with Facebook's 15%. 

The Atlas addition should pay off for Facebook for reasons that include greater transparency. The technology allows Facebook to examine the success or failure of a particular ad campaign based on Internet sales, which in theory could help it identify the most effective ads. Importantly, however, the data to track ad performance on mobile devices -- which is key to Facebook's future growth -- is behind, according to The Wall Street Journal

Patrick Pichette, Google's chief financial officer, noted at a recent Morgan Stanley Technology Conference that an ongoing debate at the online search company surrounds defining the perfect advertising and he added that there is great opportunity for innovation in the ad segment as eyeballs continue to shift to mobile devices. No doubt Facebook CEO Mark Zuckerberg or Google's chief executive Larry Page could turn things around at Groupon. Too bad they're going to be busy for the next few decades.  


GerelynT has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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