Punishing Groupon: Social Media Backlash?

Despite a growing business, the Street sends Groupon’s stock spiraling.
Taylor ProvostAugust 14, 2012

While Groupon’s second-quarter earnings report Monday showed a 2% increase in revenue over last quarter, it fell 1% short of Wall Street analysts’ expectations. The stock hit an all-time low Tuesday.

Groupon CFO Jason Child reported that the Internet coupon pioneer’s net income was $28.4 million for the quarter and compared that to a net loss of $107.4 million in the second quarter of 2011. He pointed out that Groupon’s revenue increased 45% in the quarter, to $568.3 million from $392.6 million the previous quarter. But despite these positive numbers, the Street pummeled the stock, just as it did the previous quarter, apparently because of both a growing concern that the daily novelty of Internet deals is wearing off and a general disillusionment with social-media-type companies.

Drew Handy of Seeking Alpha, a market-analysis site, attributes the pessimistic attitude directed at Groupon to “a witch-hunt stock market that is trading on emotion and overcorrelating results across industries.”

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However, while Groupon is regularly lumped in with Facebook and Facebook game-developer Zynga, both of which have suffered in the stock market since their respective initial public offerings, Groupon is not a social-media company. Unlike such companies, its revenue is not advertising driven. (Similarly, LinkedIn, which is a social-media company, has been rewarded by the market for developing revenue streams that don’t depend on third-party advertising.)

Groupon has launched numerous new services within the past year to generate new revenue streams, most notably Groupon Goods, which offers a wide range of products for limited periods at heavily discounted prices. Groupon also said it has seen widespread adoption of its new merchant and customer tools and services, such as Groupon Scheduler (so coupon-using customers can make appointments), Groupon Rewards (a loyalty program), and Groupon Now! (ultra-short-term coupon offerings). Chief executive officer Andrew Mason reported that 20% of Groupon’s participating merchants now use at least one of these new tools.

Mason urged investors to trust that these services would supplement what appears to be a slowing of the daily deals business. “Growth this quarter was driven largely through our [Groupon] Goods channel,” he said during the earnings call. Mason suggested that this growth indicated “that Groupon has evolved into a brand that customers trust for all forms of e-commerce,” and one that is different from the other big-name web companies that have received so much bad press lately.

Mason ended the call by pointing out that Groupon has not yet celebrated its fourth anniversary and already has seen $1.6 billion in sales. It’s on a pace to do well over $2 billion by the end of the year, and it has $1.2 billion cash on its balance sheet.

In other words, Groupon executives are asking investors not to panic until there is something to panic about.

So far, no one seems to be listening.