The Groupon you know is dead. If the company's goods segment can't save it, perhaps nothing will.
Groupon's third-quarter earnings report badly missed Wall Street consensus, as the daily deals segment of the business continued to struggle. Groupon reported break-even earnings on $568.8-million in revenue. Analysts polled by Thomson Reuters were looking for earnings of 3 cents a share on $590.12-million in revenue. Revenue rose 32 per cent year over year, but Wall Street was looking for more.
The daily deals business is to blame, said Stifel Nicolaus analyst Jordan Rohan, but the company's saving grace, Groupon Goods, may help pivot the company as it tries to compete more with the likes of Amazon and other shopping sites. But Groupon hasn't done enough to earn investor confidence.
"Right now, investors are not likely to give Groupon the benefit of the doubt. Accounting issues aside, investor trust in the core Groupon business model and management team is insufficient to take that leap of faith," Mr. Rohan wrote in his note. He noted that the company is pivoting from a high margin company with the daily deals to a lower margin e-commerce company. He rated Groupon hold with no price target.
In a press release, Chicago-based Groupon noted Groupon Goods is now doing $1.5-billion in global billings on an annual rate, and has done "nearly $500-million in revenues shortly after its one-year anniversary."
When Groupon began to really gain prominence during the recession in 2010 into 2011 prior to its initial public offering, investors were talking about this company in an extremely positive light. Google reportedly bid $6-billion for the company at the height of its popularity, only to be turned down. The company's market cap was $2.56-billion at the end of trading Thursday.
The company is still generating cash, though operating cash flow decreased 35 per cent year over year to $42.1-million. As of the end of the quarter, the company had $1.2-billion in cash and cash equivalents. Groupon may use up a significant portion of this cash, as it transitions its business model from daily deals to goods.
Credit Suisse analyst Stephen Ju echoed Rohan's thoughts on investor concern as Groupon pivots (transitions) its business model.
"We believe investor concern will continue to ensue given the company's short-term decision to prioritize growth in the far lower margin goods business, without clarity as to when growth will return to the higher margin daily deals business," Mr. Ju wrote in his research report. He rated Groupon shares neutral with a $6.50 price target.
Groupon is clearly in a state of flux as it tries to change itself in consumers' minds and recapture some of the luster it lost once accounting scandals at Groupon were reported.
Investors looking to bet on a successful turnaround certainly won't need a "Groupon" when buying shares. Not at these levels, and perhaps not ever.