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TheStreet Open House

Groupon's Dip and an Incorrect Call Teach an Important Lesson

NEW YORK (TheStreet) -- My recent buy recommendation on Groupon (GRPN - Get Report) completely missed the mark -- to put it mildly. That has caused me to rethink my stock evaluation process. The stock (then) traded at $6.46.

Groupon's stock closed Wednesday at $5.76, down 1.71%. Shares have plummeted 51% year to date.

Since my bullish recommendation a week ago, Groupon has lost almost 11% of its value. And given the company's struggles with rising costs and competition for advertising dollars, things won't rebound anytime soon. At the time, I said:

From my vantage point, there is at least 40% upside in shares of Groupon in the next 6 to 12 months. During that span the stock should reach $9 on the basis of margin expansion, cost-reduction and free cash flow growth.

Read More: 8 Stocks George Soros Is Buying in 2014

Clearly, I was wrong. The most important lesson learned was this: Though the market may be inefficient, it's not always wrong. There's a difference.

Matching Groupon's growth forecast with that of other Internet/retail companies such as Amazon (AMZN - Get Report) (price-to-earning ratio of 157) and Facebook (FB) (P/E of 35) was not enough. My mistake was looking at Groupon's forward P/E of 25 and thinking that it implies value.

Instead, I should have looked at Groupon's underlying operation and the company's prospects to make money. As it stands, management's plan to transform the company is falling short of expectations, despite what its recent 26% revenue growth rate might suggest.

The other thing is, while Groupon's gross billings have improved, that alone does not signal the level of strength that this metric would ordinarily indicate. Gross billing is the metric that reflects the total dollar value of customer purchases of goods and services, excluding applicable taxes and net of estimated refunds.

Read More: 5 Retailers Fighting Back Against Amazon for Back-to-School Sales

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