Is It Time To Sell Groupon?

Investors who bought Groupon (GRPN) have one reason to be happy: shares are up 97.7% in 2013. After peaking at $11.22 and closing at $9.61 recently, is it time to take profits in this company?

Executive changes

Groupon went through some executive changes in the last few months. In July mobile chief David Katz left. In the first quarter of 2013, the mobile unit accounted for nearly half of the Groupon transactions in North America. Eric Lefkofsky was made CEO of Groupon on August 7.

Quarterly earnings

Rosy results helped push Groupon shares higher. Groupon grew billings by 30% in the second quarter. North America now accounts for more than half of all billings. Over 7.5 million people downloaded Groupon’s app during the quarter, adding to the 50 million downloads to date. To enhance shareholder value, Groupon authorized a share buyback worth up to $300 million.

Gross billings rose 10% to 1.14 billion. Billings dropped in Europe, the Middle East and Africa by 24%, but North America grew by 45%. Instead of chasing deals at low profit rates, Groupon is investing in its business and focusing on more profitable product sales in the EMEA region.

Groupon lost $0.01 per share (GAAP), while generating positive operating cash flow of $160 million. Free cash flow was $29 million. The company ended the quarter with $1.12 billion in cash and cash equivalents.

Mobile play

Groupon sees itself as a mobile play. The company said during its conference call that in 5 years, there will be more than 5 billion smartphones on the market. Improving local offerings is a key deliverable for the company. Featured deals, which was a source of problems in the past, is becoming a smaller part of its business. Last quarter, under 40% of the transactions in North America came from direct email.

Related companies

We identified a number of alternative investments besides Groupon. Ebay (EBAY) shares dipped recently, after Facebook (FB) was reported to be testing mobile payments services. Paypal is a big revenue generator for Ebay, and would be hurt if Facebook was successful with mobile payments. Overstock (OSTK) is another notable online discount retailer. The company said in July that it wants to sell books for at least 10% below that books sold at Amazon (AMZN).

Click on the image below to see ratings over time. Sourced from Zacks Investment Research.

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Hold Groupon

The share price for Groupon could find support. A strong quarterly result and a share buyback suggest that the downside in Groupon is limited. Investors looking for a company focused on growing from the explosive demand in mobile devices could still consider Groupon.

 

Written by Chris Lau

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