Groupon Becomes Its Own Best Deal

NEW YORK (TheStreet) -- Shares of beleaguered deals giant Groupon (GRPN) are soaring, up more than 23% to $10.78 following the company's second-quarter earnings report, which arrived better-than-expected.

I've spent a great portion of 2012 wondering if Groupon, which arrived on the scene with plenty of fanfare would ever live up to its promise.

Groupon investors, meanwhile, didn't appreciate what was perceived as unfair attacks on the company. But those questions needed to be raised, especially when the company's 2012 existence culminated with Andrew Mason, now its former CEO, being named the worst CEO for all of 2012.

On Wednesday, none of that mattered. The company reported a loss of a penny per share on revenue of $608.7 million. When excluding one-time items, earnings arrived at 2 cents per share -- in-line with Street estimates. Business in North America, which shot up by 45%, was not only extraordinary, but the performance also helped offset a 20% decline in international sales. This means that Groupon's becoming more balanced.

Even more impressive, though, was that the company reported 50% of North American sales were made on mobile devices. As with the positive reaction to Facebook's ( FB) stock after the social media giant demonstrated its new mobile capabilities, Groupon investors cheered the progress in mobile purchasing. This has always been a popularly cited bear argument, especially from a competitive leverage standpoint. I have to admit, this caught me by surprise.

What was not a surprise, however, was that the company announced that co-founder Eric Lefkofsky, would remain as permanent CEO since replacing Andrew Mason, who was fired on Feb. 28. On more than one occasion, I've mentioned that Lefkofsky, despite his checkered past, was the best candidate to try to lead Groupon and prove that its deals concept could work.

This is not a situation where I'm trying to now take credit for the company's performance. While I've always liked Groupon's concept, I've never bought into the idea that the company could make any money, especially with more prominent names like Google, Amazon ( AMZN) and Yahoo! ( YHOO) circling the waters. So with my having such a bearish track record, I'm not going to pretend to suddenly be in love with the company.

But I also need to point out that I don't regret "being hard" on the company. I felt it was justified. Now, before you send in your "I told you so" emails, let me point out that I also predicted Groupon's recovery, including the stock's current level. In a Motley Fool article last December, I told you that Groupon just might become its own best deal in 2013. This was after the stock had dropped to a new 52-week low of $2.60 following yet another brutal quarter.

No, I didn't have a crystal ball. But I had plenty of common sense. My prediction was based on the fact that Tiger Global Management, a hedge fund operated by Chase Coleman and Feroz Dewan had immediately acquired 65 million shares of Groupon, which equated to 9.9% of the stock for roughly $202 million. I did not believe that this was an impulsive move, especially since Tiger Global had already owned more than 1 million shares of the stock.

Now, with such confidence demonstrated by a prominent hedge fund, who had also owned $527 million worth of Google ( GOOG) stock, I felt there was very limited downside risk to owning Groupon. I figured Tiger Global "knew something." But here's the interesting part; in my article last December, I also said the following:
"In other words, poor fundamental or not, there is very limited downside risk in Groupon from current levels. And if the stock only reaches a share price of $10.51, which is the midpoint of its 52-week high, Tiger Global may end up making out like a bandit in 2013 with gains of almost 120%. So let's do the math -- an investment of $202 million can potentially turn to almost half a billion ($4.45 million) in one year. Not a bad deal."

As of this writing, shares of Groupon are right around the $10.51 mark. Tiger Global's purchase turned out to be pretty smart. From where I come, we call it "stealing candy from a baby." The Street seems to have fallen in love with Groupon again. I'm happy for the company and its investors. But I wouldn't get carried away here just yet. The progress in mobile is impressive, yes. But there's still plenty of work left to be done.

I still believe that Groupon lacks the ability to create new markets. The fact that Groupon can only operate and service existing markets, make the company vulnerable to macro weakness. This is regardless of how small or temporary that weakness may be. But unlike 2012, there's now a light at the end of the tunnel. This time, though, it's not an incoming train.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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