Groupon, Inc. (NASDAQ:GRPN) is expected to release first quarter 2012 earnings next week. The company launched a closely-watched IPO last November. It was the biggest IPO by a web company since Google, and shares were so sought after that it sold 17% more shares than originally planned at $20 each – which was well above the $16 to $18 target range.
Since then, Groupon has repeatedly disappointed investors. Its originally announced earnings for 2011 were disappointing and were compounded by the fact that the IPO was so close to year end. Later, the company announced that the originally announced figures had to be revised downward and that there were material weaknesses in their internal financial controls.
At this point it’s hard to find anyone but company insiders that will say nice things about Groupon as an investment. The stock is currently trading at around $10 per share – a 50% discount from its original price just six months.
Groupon’s business is to feature daily deals to consumers from local merchants. It “brings the power of the Internet to local commerce.” They now do business in 48 countries. They claim to have offered deals from over 250,000 merchants from around the world in 2011.
Management is bullish on the company and its business model. Its CEO just released a letter to shareholders that seems to summarize what management feels will lead the company to success. He believes the “fundamentals of our business have continued to improve.” This seems to be borne out by 2011 financial results as he pointed out that revenues in 2011 grew 415%, operating margins improved from minus 134% to minus 14%, and net losses per share also improved. The CEO also noted that the company continues to grow with high satisfaction ratings from consumers and merchants alike.
He also attributed many of the company’s problems to Groupon’s extremely fast growth; growth Groupon felt was necessary in order to capitalize on what they saw as an enormous opportunity.
It is likely that many critics are influenced to a large degree by the steady drumbeat of bad news from the company. But there are legitimate concerns. Many believe that there are few barriers to entry in this business and in fact Groupon faces any number of competitors. In fact Google has its Google Offers which it hasn’t seemed to push too much so far. If Google or another major company decided to become a major player in this market, it could have a significant negative effect on Groupon.
Some even question Groupon’s underlying business model. Apparently Groupon’s long-term forecasts assume that marketing costs will drop dramatically as a percent of revenues as the company begins to dominate – comparable to say an Apple which doesn’t have to fight to get developers to design apps for its new products. These critics believe Groupon’s offering is more akin to a regular consumer products business that will require a high level of marketing forever.
There are also rumors that salespeople have been leaving Groupon and more, even some top salespeople, will be leaving. One reason seems to be that volumes on new deals are declining, leading to missed quotas and lower commissions.
So next week’s earnings announcement and related conference call could lead to some movement in GRPN. Will the numbers and statements by the company restore confidence and lead to a more positive attitude for investors and financial writers, or will they reinforce existing negative attitudes?
Only time will tell.