GOOG), Yahoo ( YHOO) and Amazon ( AMZN), on the heels of the company's Q3 earnings results, investors have come to terms with their worst fear -- things are only going to get much worse.
Q3 Was Anything But GoodFor a company mired in controversy for most of this year, including investigations by the SEC regarding its accounting and disclosures, Groupon's Q3 report failed to inspire any confidence that its business is sustainable. For the period ending Sept. 30, Groupon reported a net loss of $3 million -- essentially breaking even on a per share basis. While this was a significant improvement from the $54 million loss of a year ago, it also represented a sequential decline. Even though adjusted earnings of 3 cents per share matched analysts' estimates, it was not enough to please investors. Likewise, although Groupon grew revenue by 32% to $569 million, it fell 4% short of analysts' estimates of $591. Management said that continued weakness in Europe offset what has been a strong performance in North America. Consequently, gross billings were abysmal -- growing by only 5% year-over-year but also declining by 5% sequentially. This is the metric that indicates the total amount spent by consumers on Groupon's deals. On the bright side, the company is expecting a slight uptick in performance for the fourth quarter -- forecasting revenue in the range of $625 to $675 million. Though the midpoint of the company's guidance was high enough to eclipse analysts' estimates of $634.9 million, this was not enough to prevent the stock from selling off nearly 16% immediately following the announcement -- falling as low as $3.30. Since then, the bleeding has not stopped as the shares have fallen another 20% to Tuesday's close of $2.63.
The Bottom Is Falling OutAlthough the midpoint of Groupon's Q4 projections arrived much better than expectations, the company made no promises that operational improvements will be meaningful. But management did say that investors can expect better international performance as it works to improve (among other things) mobile support, personalization as well as improvements in its deals mix. But investors are beginning to wonder if these initiatives will matter. I just don't envision how.
It seems the bottom has started to fall out of what was once a very promising concept. For Groupon, growth of 81% in North America is just not enough to sustain a model standing on feeble fundamentals as evident by an almost 50% drop in free cash flow -- falling from almost $50 million in Q2 to $26.1 in the recent quarter. Yet, some investors wish to look at the light at the end of the tunnel. That's all well and good, but investors have to realize that for the stock to work, the company must be able to show exactly how it will ever earn a profit despite having little to no competitive leverage. For these reason, it is hard to see how a bankruptcy filing is not in Groupon's future. What's more, the company's extremely low profit margin will make it a very unattractive acquisition candidate. Likewise, its business model would cost little to nothing to duplicate. These realities have caused analysts to rush to downgrade the stock, including William Blair who recently to lowered his rating on the stock to market perform.