Groupon stock is falling off a cliff. Shares of the daily deals company are down by a staggering 67% year-to-date on the back of disappointing financial performance over the past several quarters and uncertain prospects in the middle term. Should investors capitalize on the opportunity to buy Groupon stock at discounted prices, or is it better to stay away from the company until there is some kind of light at the end of the tunnel?
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Why Groupon stock is getting hammeredGroupon is in a difficult situation. Most customers don't find the company's daily email offerings particularly exciting, or even relevant. Management has been trying to generate growth with initiatives such as expanding internationally and venturing into e-commerce, but this strategy has produced disappointing results so far.
The company reported a 2% decline in gross billings (the total dollar value of customer purchases) during the third quarter. This drop was mostly due to currency headwinds, though, as gross billings grew 6% year-over-year in constant currency. Revenue came in at $714 million during the period, nearly flat versus the same quarter last year and increasing by 7% in currency-adjusted terms.
The company is losing money on a GAAP basis, and management fully admits that Groupon needs to accelerate growth and improve profitability. In this context, the company announced three strategic initiatives to jump-start performance in the coming quarters: significantly increasing marketing expenditures, streamlining international operations, and moving away from low-margin categories in e-commerce.
Management intends to transform Groupon into a more focused business, spending more marketing money in North America and select markets, while reducing the company's presence in less promising product categories and geographies. This sounds like a reasonable strategy, but it's really hard to tell what kind of impact it will have on both sales and margins over the coming quarters.
For 2016, the company is expecting revenue in the range of $2.75 billion to $3.05 billion. That doesn't sound very promising in comparison with approximately $3.06 billion in forecasted sales this year. The way things are going, it appears investors in Groupon should get ready for unpredictable performance in the middle term.
Not a good dealGroupon isn't the only company facing big difficulties in the discount-coupon business. Even the almighty Amazon, one of the most powerful and successful companies in the online world, is having a hard time in the sector. Amazon has invested nearly $200 million in LivingSocial, one of Groupon's closest competitors, yet Amazon's annual report for 2014 shows that LivingSocial suffered a 23.5% revenue decline during the year, and the company is also losing money at the operating level.
Things don't seem to be getting any better for LivingSocial either. The company recently announced that it will be firing 20% of its workforce and changing its business model, moving away from daily deals and transforming itself into a marketplace for experiences. Furthermore, Amazon recently announced that it's closing Amazon Local, another business competing directly against Groupon, on Dec. 18.
RetailMeNot is another company reporting major problems in the online coupons business. Investors reacted with optimism to RetailMeNot's earnings report for the third quarter of 2015, but only because the numbers were better than feared. That doesn't mean the key variables are moving in the right direction. Far from it: RetailMeNot is expecting a 14% revenue decline during the fourth quarter of 2015, while total sales for full-yearl 2015 are forecasted to fall by 9% annually.
It's not only that Groupon is delivering disappointing financial performance. Companies such as Amazon and RetailMeNot are confirming that there is little room to make money in online coupons and daily deals. The industryenvironmentwill most probably remain fierce in the future, putting additionalpressure on Groupon and its chances for a sustained turnaround.
Expectations are quite low for Groupon at this stage, so the stock offers huge upside potential if management can lead the company toward a sustained improvement in sales and profits. However, that doesn't make Groupon stock a smart purchase. You get what you pay for with this company, as there's little visibility on when or how things will turn for the better.
The article Groupon Inc. Stock Is on Sale: Buying Opportunity? originally appeared on Fool.com.
Andrs Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends RetailMeNot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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