Groupon Inc (NASDAQ:GRPN) appears to be making progress in its long, difficult transition from daily deals to e-commerce, and the market is mighty happy, sending GRPN stock up sharply by midday Friday.
Groupon stock has been wildly volatile throughout its short history, and unfortunately for anyone holding GRPN, it’s been all to the downside for the last year. Groupon stock lost 30% of its value in 2014, and it has been negative all of this year too.
However, while Friday’s gains were a much-needed breath of fresh air, don’t bank on Groupon stock doing more for you anytime soon.
Groupon’s Long Struggles
Encouraging earnings were a long time in coming, but Groupon finally delivered, and the boost from quarterly results has GRPN within range of positive territory for 2015.
The market’s knee-jerk reaction to Groupon earnings was to sell. Shares in GRPN slumped in after-hours trading Thursday, as a soft outlook overshadowed better-than-expected earnings.
By Friday morning, however, the focus shifted to revenue and active user growth, as well as GRPN shopping its Ticket Monster business.
The key to Groupon is how well it’s managing its transition away from daily deals to become “a leading mobile commerce destination.” Rather than push emailed coupons to members, GRPN wants pull customers in to select from a list of promotions to buy physical goods.
Most analysts believe that the change in strategy is the right one and will drive upside in Groupon stock if the company can pull it off.
The problem has been that any evidence the change in strategy is working has been sparse and spotty. And even when measures like local billings and gross margin rise, profits have been hard to come by.
GRPN Swings to Profit
So it’s something of a milestone in its transition that GRPN swung to a net profit from a net loss in the year-ago quarter, and beat Wall Street estimates by a comfortable margin.
For the most recent quarter, GRPN had net income of 1 cent a share, vs. a net loss of 12 cents a share in last year’s fourth quarter. On an adjusted basis, which is what analysts typically look at, Groupon earnings came to 6 cents a share to beat Street estimates by 3 cents, according to a survey by Thomson Reuters.
Revenue grew 20% to $925 million, which was also ahead of analysts’ estimates. Excluding the effects of a stronger dollar, revenue would have expanded by 25% in the fourth quarter. For the full fiscal year, revenue rose about 32% on both a currency neutral and foreign exchange basis.
Also boosting Groupon stock was the company’s confirmation that it’s looking to sell Ticket Monster. GRPN is talking about valuations of as much as $1 billion for the business, according to media reports. That would deliver a remarkable return for GRPN, seeing as it bought Ticket Monster a little more than a year ago for $260 million.
Despite the encouraging quarter, Groupon served up a soft outlook. For the current quarter, GRPN forecast earnings to come in between break-even and a profit of two cents a share. Analysts surveyed by Thomson Reuters projected earnings to come in at 2 cents a share. Revenue guidance was likewise light, with GRPN targeting a top line of $790 million to $840 million, vs. a Street for $856 million.
Bottom Line
That the market could shrug off the tepid outlook to focus on GRPN’s progress in its strategic transition might represents some new-found optimism on the part of the market. More likely, it’s just part of GRPN’s usual volatility.
As well as the reshaping of the GRPN might be going, it still looks like an unnecessarily risky bet for a long-term portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
