A house of cards, the internet stock, Groupon (GRPN) down 6.69% isn't. But don't mistake this for an opportunity to make some profit, nor run out and buy the stock. Is it a case of knowing now, what I should have know back then.
The worst critics of the leading Internet coupon site have, in the past, argued that its business model would collapse when it dialed down marketing expenses. Without spending to promote its daily deals, it would be tough to generate growth.
Groupon's marketing expense has fallen; however, the company still doesn't generate net profit. That is largely because Groupon is getting no operating leverage with respect to overhead. Costs associated with sales and corporate staffs have remained at 50% of revenue. Nor is the company likely to get additional benefits on the marketing line-it expects to continue to spend 20% of revenue. Meantime, the cost of goods sold as a percentage of revenue rose in the first quarter—to 21% of revenue, up from 13% in the same period a year ago. And the lower marketing expense could have a delayed impact. Groupon's guidance for the second quarter calls for just 2% growth in revenue compared with the first quarter.
The 40% stock-price surge since last week's all-time low likely reflects excessively bearish expectations for the company, and perhaps short sellers buying back shares to cover their negative bets. Either way people are hoping for a bounce back.
They may be doing so prematurely. Restrictions that have prevented insiders from selling shares will be lifted on June 1. Roughly 90% of shares outstanding will come available for sale for the first time. Investors shouldn't step in front of a potential tsunami of selling.
