Groupon Gains on Turnaround Expectation (GRPN)

The possibility of reporting its first annual profit after becoming a publicly traded entity lured traders to bid for the shares of daily deals company Groupon (NASDAQ: GRPN), taking the stock price upwards for the second consecutive day.

The Illinois-based subsidiary of The Point LLC, Groupon operates a web-based marketplace that connects merchants and consumers in North America and worldwide. Groupon offers products and services at a discount. The modus operandi involves sending daily emails to its opt-in list. Discounted offers for goods and services are sent based on the location and personal preferences of subscribers. As an alternative, consumers can become aware of the latest offers by accessing Groupon’s website or making use of mobile applications.

After going public in early November 2011, Groupon hardly saw its share price firm up. On the other hand, a CNBC report published on January 4, 2012, pointing to difficulties in merchant retention, along with a Seeking Alpha story, resulted in a fall of more than 9% in the share price to $17.81 within two days. Even though the company had remarkable growth rates, huge net losses kept investors at bay.

Groupon reported revenue of $1.6 billion for fiscal year 2011, a 415% increase from the $312 million in revenue for the corresponding period in 2010. The company reported a fiscal 2011 operating loss of $233 million that narrowed from an operating loss of $420 million in the corresponding period from a year ago. For fiscal 2011, the negative operating margin in percentage terms has come down to 14% from 134% in 2010. The company also had posted operating income of $39.6 million and $46.5 million in the first and second quarters of fiscal 2012 respectively. Groupon reported a net income of $28.4 million in the second quarter of fiscal 2012. The company had reported net losses in the previous three consecutive quarters. With consecutive net losses, the share price slid to around $7 in the month of July. Groupon, as per its second-quarter 2012 balance sheet, had $1.2 billion in cash equivalents and no long-term debt. A Seeking Alpha report published on October 4, 2012, highlighted the fact that Groupon had reduced marketing expenses considerably from $230 million and $220 million in the first and second quarters of 2011, to a combined $204 million for the first and second quarters of fiscal 2012. It might be noted that the company rejected a $6 billion acquisition bid from Google in December 2010.

In the recent past, Groupon has started offering deals on vacations. The company also started a yield management service under the tag “Groupon Now!” and a loyalty program commercially named “Groupon Rewards”, in May 2012. The company also took another leap forward with its payment processing service, named “Groupon Payments”. Also in May 2012, Groupon acquired Breadcrumb, a restaurant management system built for iPad use. The acquisition spree continued in the month of September 2012 with Groupon taking over Savored, which facilitates online reservations at select full-service restaurants. With these moves, Groupon is slowly transforming itself from being a daily deals company to a full-fledged end-to-end e-commerce service provider.

With improving fortunes, analysts expect the company to report profits in the third and last quarters of fiscal 2012.

Some reports attribute short covering as the reason for today’s gain. In contrast to the rise in the share price of Groupon, another social media company, Zynga (NASDAQ: ZNGA) lost 12% due to a projected Q3 loss and a cut in the 2012 forecast.

Groupon ended the day at $5.25 per share, up $0.45 or 9.4% on a volume of 18 million shares.

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Published by Steve Hackney

Steve Hackney is a corporate finance professional with over 14 years of experience in cash management and investing. He earned a Bachelor of Science in Finance from Florida State University and holds a Certified Treasury Professional certification. Steve lives in Orlando, Florida with his family.