Groupon's Deal Fails for Investors

NEW YORK (TheStreet) -- Beleaguered deals giant Groupon (GRPN) has recently come under fire from investors and at times consumers who have begun to wonder about the company's business model -- going so far as to ask is the company a scam?

So needless to say, Groupon had much to prove leading up to its second-quarter earnings announcement on Monday.

What it proved, however, only affirmed the worst.

First, here's the good news. The company reported net income of 8 cents per share -- arriving 5 cents better than expected. Groupon also met analysts' expectation by issuing third-quarter revenue guidance to arrive in the range of $580 to $620 million.

But that's where the good news ended as the rest of the numbers turned into the typical European blame party resulting in the stock dropping as much as 20% after-hours.

For the quarter, the company reported revenue of $568 million -- missing analysts' expectations of $573 million. Here's the tricky part, the revenue figure was 45% higher than it was a year ago. While that would mean confetti should be flying all over the place, it pales in comparison to its first-quarter -- during which revenue soared by 89%.

Not only did its sales show a sequential decline, but its growth in active customers continues to decline as well.

For the quarter, management said its active customers number gained only added 3% from the first to second quarter -- representing one-third of the growth generated from Q4 to Q1. More than anything else I think this is what spooked investors. It seems Groupon is dealing with the reality of having set expectations too high. These are the same concerns affecting another social media stock: Facebook (FB). The similarities are glaring.

As with Groupon, Facebook did beat on EPS, but unlike Groupon it also beat on revenue. But although its overall numbers were relatively respectable, including announcing an increase in active monthly users, it failed to impress investors who have been waiting patiently for the company to prove that it deserved their money on the heels of a disappointing IPO.

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