After Groupon reported its Q4 earnings yesterday, I suggested it was time for all the folks saying the company “can’t make money” to finally admit that they’re wrong.
And it is time for that.
Groupon’s business generated a nice operating profit and cash flow in Q4, while still posting modest growth. And the company expects to post more growth and profit in Q1. So it obviously can make money.
(The cool-kid argument had been that, once Groupon cut marketing costs, revenue would tank because the company was “just a Ponzi scheme.” That theory, however popular, has been proven wrong.)
True, Groupon lost money on its net income line in Q4. But this was the result of a bizarrely huge international tax bill, which is not what Groupon dissers were referring to when they opined that Groupon couldn’t make money. This big tax bill will apparently persist for a few quarters, but it has nothing to do with the company’s operating business, which is now profitable.
Just because it’s time for Groupon haters to admit they were wrong about the company’s business model doesn’t mean it’s time to buy the stock.
“Stocks” are different from “companies,” and it’s a disparity between a stock price and a company’s estimated fundamental value that creates opportunities for investors.
When Groupon’s stock popped to $30 on the day of the IPO, I said “Enjoy The Ride, Groupon Investors, I’m Outta Here!!!” And that stance wasn’t just based on the market’s irrational exuberance on the morning of the IPO. It was based on the theory that Groupon’s growth would continue to decelerate massively over the next few quarters and that a $20 billion market value didn’t account for that.
Well, Groupon’s stock has now dropped to the low-$20s, giving it a market value of ~$15 billion. This is an improvement from a potential investment perspective. But, unfortunately, in my opinion, it’s still too high a price for the stock to be attractive given the business transition the company is undergoing (from hyper-growth to profitable growth).
At $15 billion, Groupon is trading at about 6X a 2012 revenue estimate of about $2.5 billion. That’s not outrageous, but it’s also not cheap, especially for a company whose growth is decelerating so rapidly.
This quarter’s growth is expected to be modest, and growth for several quarters thereafter is likely to remain challenging. In addition to cutting back on marketing spending, Groupon fired a bunch of salespeople last fall, and the impact of this change is probably starting to hit the company right now.
Groupon also has now made a dumb-arse rookie mistake that should raise some yellow flags.
Yesterday, in its first quarter as a public company Groupon stopped disclosing certain operating metrics that it had disclosed in all of its pre-IPO filings.
What does that mean?
It probably means what it usually means any time a company stops disclosing something:
Those key metrics now look bad enough that the company doesn’t want to share them.
And that’s not good news.
So, yes, it’s time for the smug Groupon haters who have confidently maintained for the past three years that the company could “never make money” to finally admit they were wrong.
But, no, it’s not time to buy Groupon’s stock.