Groupon's Stock Revival: Deserved, Or Dumb?

It’s been less than six months since a pissed off Wall Street mob chased Groupon (GRPN) founder Andrew Mason away and wrote bitter obituaries for the company, many in the form of sell ratings from investment analysts. But lately, investors can’t seem to get enough of Groupon shares.

GRPN Chart

GRPN data by YCharts

Shares are up 130% this year on a steady rise that began even before Mason hit the street. Morgan Stanley turned its hold rating on the shares to a buy in August, joining Deutsche Bank that month as buyers. Most of the sell and underperform ratings that plagued the shares last year have been upgraded to holds. Very few investors are betting against the company now. Short interest has dropped from about 26% of float to about 6%.

GRPN Percent of Float Short Chart

GRPN Percent of Float Short data by YCharts

Whether all this newfound optimism for Groupon pays off depends largely on whether the company can build a niche for itself in the vastly competitive world of online shopping. While there are encouraging signs that Groupon’s on the right track, the company’s business model is young and unproven, and its long-term success with it still a subject of speculation.

Groupon’s return to credibility is, ironically, fueled by trends that Mason told investors to expect all along, but failed to deliver (over and over again) in the time frame Wall Street expected. Groupon’s core North American business – selling a $25 coupon for a $50 dinner, for example – has seen a 35% increase in active deals since the beginning of the year. The sharp declines in overseas sales that alarmed last year have slowed, and investors once again see major international expansion for Groupon.

Furthermore, smartphone and tablet users now make up 50% of its North American sales, with more than 7.5 million people downloading its apps in the second quarter alone. That’s considered a fine accomplishment, as other companies like Facebook (FB) have struggled to make money off the fast-growing population of mobile users.

With the intent to diversify the business, Groupon now sells actual products on its site as well as deals for services. Its store is a seemingly random collection of items – a wireless projector, a girdle and stretch mark cream are on the front page offer today – sold at big mark-downs. The company has talked of building warehouses to support its expansion, but plans are vague. Groupon also plans to sell payment processing equipment to merchants.

The catch is that none of Groupon’s businesses are particularly unique. Amazon.com (AMZN), too, runs coupon deals through its LivingSocial investment, but that company is operating at a loss. Both face growing competition from smaller companies. As for the goods sales, it’s particularly unclear what will draw shoppers to Groupon instead of Amazon.com, eBay (EBAY) or any other of the hundreds of online shopping sites. The difference between Groupon and Amazon and eBay here is that a little bit of revenue from goods sales goes a long way toward boosting Groupon’s numbers.

GRPN Revenue TTM Chart

GRPN Revenue TTM data by YCharts

Investors have tempered their expectations for Groupon a lot since its famed 2011 IPO, but its share valuations still imply high growth expectations for a long time. Its forward price to sales ratio is still around 2.8, which implies expectations of strong growth for many years. Analysts have forecast a 9% revenue gain this year, to be followed by a 14% gain from there in 2014. For comparison, analysts expect 22% revenue growth for this year and next at Amazon, which trades at a forward PS of 1.8.

GRPN Forward Price / Sales Ratio Chart

GRPN Forward Price / Sales Ratio data by YCharts

Wall Street is happier with Groupon now because it popped up a store to generate quick revenue, and the old coupon business is growing again. But the competition for all its businesses is just beginning to gel. How all these initiatives turn Groupon into something that can beat Amazon, in particular, at its own game in the long run isn’t clear at all. Long-term, Groupon will need more than the odd new initiative to grow as successfully as investors expect.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  stocks that look pricey   

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