After market close yesterday, Groupon, Inc. (NASDAQ:GRPN) announced its financial results for the second quarter of 2012. In spite of higher than expected earnings and some encouraging trends, GRPN fell almost 20% in after-hours trading – from a close of $7.55 to as low as $6.05. The price drop appeared to be mainly driven by disappointment in the company’s forecast for Q3.
Groupon’s business is to feature daily deals to consumers from local merchants. It “brings the power of the Internet to local commerce.” The company now does business in 48 countries and claims to have offered deals from over 250,000 merchants from around the world in 2011.
Groupon went public last November in a highly anticipated IPO and almost immediately began to disappoint investors. It first announced disappointing results for 2011, which coming so soon after the IPO was doubly surprising. Soon after, it announced that it had to revise those numbers even lower because it had been using improper accounting practices. The stock price has steadily decreased from its IPO price of $20.
But second quarter results and third quarter guidance that was pretty close to expectations don’t seem to warrant a 20% drop in after-hours trading. Sales were up 45% over the prior year (in line with expectations) and income was above expectations. Revenues from the direct sale of products (which was only launched in Q4 2011) jumped to almost 10% of total revenues for the quarter, the number of active customers increased 65% year-on-year and mobile adoption is increasing.
And, encouragingly, marketing and customer acquisition costs continue to decline. As we reported here and here, the ability to reduce marketing costs is key to Groupon’s business plan. The basic concept is that Groupon believes that as it develops its brand, merchants and consumers will come to it without heavy marketing efforts – analogous to app developers flocking to Apple. Critics believe that Groupon will have to maintain a high level of marketing – just like fast food chains and Coca-Cola. If Groupon is right, it has a chance to become highly profitable. If not, it is unlikely the company will ever become extremely profitable. So the continued trend of reduced marketing costs is very encouraging indeed.
Probably the darkest cloud on Groupon’s horizon is whether or not the Groupon brand and big head start in the business will serve as a barrier to effective competition. If it turns out that local or regional competitors can grab significant local market share, or if a company such as Google can grab market share internationally, then Groupon’s growth prospects are reduced. A troubling sign here is that over the last six months there have been a steady trickle of reports of salespeople leaving – many to competitors.