The Bizarro World of Social Media
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In the Bizarro world of internet stocks, an insider NOT selling becomes the headline. Like this one over Labor Day weekend from All Things D, “Groupon Co-Founder Eric Lefkowsky Doesn’t Sell Millions of Shares.” Turns out he transferred some 18.7 million shares to a family charitable foundation as well as some LLCs. Whew!
Similarly, Yelp (NYSE: YELP) shares spiked 22% when insiders did not sell during the lockup expiration and Facebook shares rose 6% when it was announced Mark Zuckerberg would not sell shares for a year. It’s a dangerous sector when not selling instead of insider buying becomes the news.
Groupon (NASDAQ: GRPN) in particular has suffered in this netherworld of social media stocks down almost 90% from its high hitting a low on $4.00 on September 4. Then there is ‘frenemy” Howard Schulz , CEO of Starbucks who quit the board in April making a mega-million dollar coupon deal with archrival Living Social. More indignities have been heaped on as top salespeople leave including national sales executive Lee Brown and Jayne Cooke, who brokered some of Groupon’s most successful deals with Gap and Nordstrom.
Like a superhero bound and humiliated by a nemesis the Q2 earnings release on August 12 which reported a 4% decline in gross billings to $1.29 billion since Q1 (Gross billings are what businesses are charged for the Groupon deal) and disappointing on revenues from analysts’ estimates humbled the stock as share price dropped 43% over little more than two weeks. The call also cited major weakness in Europe with exchange rates and economic malaise hurting their numbers. Still, that begs the question if Europeans are so strapped shouldn’t a discount deal site do well? CEO Andrew Mason informed on the call that deals over $100 in Europe weren’t selling well but are initiating a deal ‘personalization’ program much like they already have in the States to improve sales.
But all is not lost for Groupon. Groupon Now!, a service which enables mobile users to get an immediate deal based on their geographical location, is gaining ground. Mobile use of Groupon is up 33% in North America partly due to Groupon Now!
Then there’s Groupon Goods, a direct-to-consumer site offering physical merchandise at a discount. This segment is growing 30% if revenues are counted in the same manner as revenue from Groupon deals. But Barclays analyst Mark May downgraded the stock believing the Goods strategy is a risk to profit margins. May was also concerned about customer growth stalling. He predicted 15% downside to $4.00. Prophecy fulfilled.
Also unfortunate for Groupon was the exodus of early investors like Battery Ventures, Andreesen Horowitz and Kinnevik Investment AB. Groupon still has loyal friends in T. Rowe Price and Morgan Stanley who have upped their stakes. Oldest and firmest friend New Enterprise Associates hasn’t sold any shares and neither has Kleiner Perkins.
Yelpers Not Selling
Similar headlines ran after the lock up expiration for Yelp and the stock has risen almost 30% since then. It rose another 6% after CEO Jeremy Stoppleman spoke optimistically of the company’s mobile future at a Citigroup conference on September 5. He emphasized ads would be, ”unobtrusive to the user” and remarked that mobile unique users are up 25%. Yelp is a service which allows users to review businesses and products and is monetized by paid ads from businesses. According to a study just released by UC Berkeley economics professors a rise of even a half star rating on Yelp reviews increases the likelihood of packing a restaurant at peak hours by 33%. Note that the businesses have no control over the review content but the ads can attract new customers.
The move in Yelp may have capped short term upside but all these social media stocks are quite fragile like social butterflies, and if you’re interested, the price will likely come down.
For these social media stocks it’s all about mobile and insiders not selling stock. Both have negative EPS, Yelp at $0.37 and Groupon at $0.19 and both, even now, have short interests of over 20%. What’s interesting is the forward P/E for Dec 31, 2013 for Yelp is 516 but for Groupon is 11.38 if the share price doesn’t move at all. Could it be that Groupon has sunk to a level where it is a buy? It has $1.5 billion in cash. An ambitious, call it heroic, push against Amazon.com (NASDAQ: AMZN) on two fronts with the Groupon Goods business and against Living Social, of which Amazon owns a 29% stake, could prove very interesting to watch.
It already hit the price target of $4.00 that Barclays predicted. I wish I was as good as a prognosticator as Mark May but maybe Groupon is a better buy than Yelp right here. As long as Bizarro headlines keep coming out like “Summer intern Susie Creamcheese is NOT selling her Groupon shares!!!” there is a glimmer of hope for Underdog!
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