Let’s Make a Deal, 21st Century Style
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Americans love a deal. We always have. We even created a game show out of it.
With the economy on shaky ground, finding the best price for anything is a big deal - groceries, to clothes, to vacations. So you’d think with the desire to score a big deal would mean companies like Groupon (NASDAQ: GRPN) would be flying high and make an attractive investment.
You’d be wrong.
Groupon’s stock plummeted by 27% on the day of its most recent quarterly earnings, closing at its lowest price since the company’s IPO. Groupon’s reported Q2 earnings were only slightly below Wall Street’s expectations and the company also just reported its first-ever profit. So why the slide?
Part of it can be attributed to the fact that Groupon’s earnings were slightly below Wall Street’s expectations. But that is only the most obvious thing. A big component of Groupon’s business is billings. Billings are the total value of merchandise sold, less expected returns. That number actually declined from the previous quarter. According to the AP, gross billings fell to $1.29 billion in the quarter ending June 30, down from $1.35 billion in the first three months of 2012.
In other words, Groupon is selling less.
On the surface, this seems like nonsense because Groupon’s "direct" sales grew $46 million dollars. This revenue comes from the new Groupon Goods business, which buys items (such as jewelry) from manufacturers and sells to consumers. But Groupon accounts for this revenue differently than it does for its "deals" business. Groupon Goods revenue is reported as the entire price of the item, not just what is collected from the vendors. The traditional "deals" revenue is reported as the amount collected from the vendor.
But direct sales aren’t Groupon’s core business, it's coupons and deals. That business, merchandise and coupons sold to consumers, is either flat or the decline. Had Groupon accounted for revenue from both business lines the same way, growth would have been significantly lower at 30%.
According to this story from Business Insider in Q1, Groupon’s gross billings grew 102% year over year. In Q2, that number slid to 38%. If that trend continues, the growth rate will eventually be negative. So, despite the fact that Groupon is finally profitable and has a lot of cash on hand, Wall Street will only pay a 2x revenue.
Groupon, of course, attributes this to the weak European economy and unfavorable exchange rates. Some analysts point to “deal-fatigue,” claiming that the daily deals trend has hit a wall.
Groupon was the first company in the daily deals sector and raced to build solid market share. However, a plethora of copycat companies have since sprung up, including LivingSocial, Google Offers, and Social Buy. Consumers wanting to find a deal have plenty of options to from which to choose.
LivingSocial has been putting off an IPO since last year. Google Offers, obviously, is not traded separately from Google (NASDAQ: GOOG) which has been a rumored buyer of Groupon in recent days. Google recently purchased Frommer’s travel guide and if they decide to integrate Frommer’s and Zagat into Google Offers, that would be a huge blow to both Groupon and Living Social. Social Buy is also not publicly traded.
As of today, according to the NASDAQ ticker, Google is robust with a stock price above $600 and an EPS of $33.73, but it isn't clear how much of that is related to Google Deals.
Facebook (NASDAQ: FB), which has its own financial woes, killed it's Facebook Deals a year ago, after a four-month experiment failed to result in significant revenue. In an ideal world, this would have eased pressure on Groupon, but it didn't. Of course, with Facebook stock rapidly tanking (the stock price today is only a little more than $19, well below it's IPO price), it's no wonder it got out of a soft daily deals market.
Moves by Groupon have not exactly reassured investors.
Company officials announced their intention to address problems in Europe by updating technology infrastructure, bringing in lower-priced services, and increasing advertising to bolster brand awareness. That means marketing costs will most likely be higher, cutting into expectations not only for a few quarters, but possibly years.
The announcement did not make a big impact on analysts, who cited the unknown nature of the ROI and timing of those investments. They also were unimpressed by the lack of an execution track record by Groupon management.
None of this can be good news for Groupon, who has been facing management difficulties for some time. Last April, the company announced it had overstated its first earnings report since the IPO, an amateur move that undermined investor confidence.
Apparently Groupon’s moves have failed to regain the confidence of consumers, investors, or analysts, who are opting for an attitude of “show me what you’ve got” instead of the carefree stance that dominated the last tech bubble.
Meanwhile, merchants are also expressing dissatisfaction with Groupon’s services, particularly in Europe. While the premise is that by offering deals merchants can convert those deal-seekers into repeat customers, that hasn’t happened.
Bottom line, the desire to find a deal is still strong and the company who manages to successfully solve how to match deal-crazy consumers with merchants all while making a profit stands to make a lot of money. Whether that company is Groupon remains to be seen.
Let’s see what’s behind Door #1.
MarySutton has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
