Latepost Groupon Gloom: Bargain Of The Solar Daytime Or Croak Spiral?

In keeping alongside this week's subject of revisiting ghosts of valuations past, I decided to accept a aspect at approximately other fallen angel, Groupon. The stock has collapsed to $4.44 from its post-IPO high of $29 in addition to employees seem to last fleeing from the exits. If you lot are a contrarian alongside a strong stomach, it would similar the stars are aligned for approximately bottom line-fishing simply is Groupon a buy, fifty-fifty at this discounted price?

To brand this assessment, I decided to accept a aspect at my posts on Groupon from terminal year:

1. In my very starting fourth dimension post on Groupon inward June 2011, I looked at their effort to motion client acquisition costs from the operating expense to majuscule expenditures column. While I was sympathetic to the full general declaration that operating expenses that create benefits over many years (such every bit R&D, exploration costs in addition to fifty-fifty client acquisition expenses) should last treated every bit majuscule expenditures, I was skeptical inward Groupon's illustration since at that spot was picayune testify that Groupon's acquired customers stayed on for long periods in addition to besides because Groupon did non follow through fully in addition to process customers every bit assets (and amortize or depreciate these assets over time). 
2. In my employees seem to last fleeing from the exits. If you lot are a contrarian alongside a strong stomach, it would similar the stars are aligned for approximately bottom line-fishing simply is Groupon a buy, fifty-fifty at this discounted price?
   
   To brand this assessment, I decided to accept a aspect at my posts on Groupon from terminal year:
   
   
   1. In my second post in Oct 2011, I looked at Groupon (as good every bit Google in addition to Green Mountain) alongside an optic towards potential growth, using 4 tests: the feasibility of the growth given the overall marketplace position served yesteryear each company, the capacity to scale upward growth (i.e., maintain growth every bit the companies larn bigger), the value created yesteryear that growth in addition to the upshot of management credibility on how the marketplace position perceives that growth.  
   2. In my employees seem to last fleeing from the exits. If you lot are a contrarian alongside a strong stomach, it would similar the stars are aligned for approximately bottom line-fishing simply is Groupon a buy, fifty-fifty at this discounted price?
      
      To brand this assessment, I decided to accept a aspect at my posts on Groupon from terminal year:
      
      
      1. In my third post on Nov 2, 2011, I valued Groupon at the fourth dimension of the acquisition. Using  "aggressive" assumptions on revenue growth (50% annually for starting fourth dimension five years, scaling downwards to mature growth yesteryear twelvemonth 10) in addition to pre-tax operating margin (23%), I estimated a value of $14.62 per share, below the $16-$20 arrive at that investment bankers were touting.
      2. The stock did become populace on Nov 3, 2011, at $20/share, in addition to jumped to $28 yesteryear the cease of the day. My employees seem to last fleeing from the exits. If you lot are a contrarian alongside a strong stomach, it would similar the stars are aligned for approximately bottom line-fishing simply is Groupon a buy, fifty-fifty at this discounted price?
         
         To brand this assessment, I decided to accept a aspect at my posts on Groupon from terminal year:
         
         
         1. In my fourth post on Groupon, on Nov 4, 2011, looked at the companionship inward the context of a give-and-take of the value of growth. For growth to add together value, I argued that it has to last accompanied yesteryear "excess returns", which, inward turn, demand competitive advantages or barriers to entry. Looking at Groupon's concern model, I could non mean value of whatever meaning barriers to contest that would preclude others from entering the marketplace position in addition to eating away at Groupon's margins. Using a simulation, I estimated the next distribution for value/share for Groupon inward Nov 2011 in addition to argued that the stock was to a greater extent than probable to last worth less than $10/share than it was to last exist worth $30:
         
         
         
         
         
         
         Influenza A virus subtype H5N1 twelvemonth later, it is clear that I nether estimated how speedily whatever competitive advantages that Groupon's starting fourth dimension mover condition gave them would last eroded. This is clear non exclusively from perusing my electronic mail box every morning time (and removing the dozen emails from dissimilar deal-of-the-day purveyors) simply besides inward Groupon's fiscal results. As the most recent earnings study makes clear, revenue growth has slowed, profitability has lagged in addition to the stock cost collapse is inward reaction these changes.
         
         As I revisited my valuation, every bit alongside Facebook, I had to caution myself non to overreact, simply the news, every bit I reckon it, is far to a greater extent than dire for Groupon than it is for Facebook. While Facebook's results were disappointing inward terms of converting potential to profits quickly, the potential (from their vast user base of operations in addition to the data they receive got on these users) however remains. In Groupon's case, where the concern model was clearer at the fourth dimension of the IPO, the concern model has collapsed in addition to it is hard to reckon what the companionship tin practice to laid upward itself apart from the contest in addition to make money at the same time. As a result, the changes I made inward my Groupon valuation are to a greater extent than dramatic than the changes I made inward my Facebook valuation. My base of operations twelvemonth numbers reverberate their most recent quarterly filing, alongside trailing 12-month revenues of $1.965 billion in addition to operating income of $71 million. My forecasted revenue growth charge per unit of measurement is 25% (leading to revenues inward 2022 of $10.3 billion, every bit contrasted alongside my before forecast of $25.4 billion), my target margin is 12% (down from my year-ago approximate of 23%) in addition to my sales/capital ratio is forthwith downwards to 1.25 (from a year-ago approximate of 2.00). The cease final result is a value per portion of $4.07, which makes the stock, at best, a fairly priced stock. In fact, if you lot choose inward the likelihood that the trace of piece of occupation solid may non become far through its growth pains inward the spreadsheet, the value per portion drops fifty-fifty further. As alongside the Facebook valuation, you lot tin download my spreadsheet in addition to pose your ain estimates in... I receive got a shared Google spreadsheet for those of you lot who desire to portion your numbers...
         
         There are ii broader signal that are worth making here.
         
         1. A dramatic stock cost drib is non ever a buying opportunity: Most immature growth stocks are bailiwick to gyrations in addition to it is non uncommon to reckon growth stocks plummet, when they don't run across the lofty expectations that investors receive got for them, in addition to nosotros receive got seen this plough over to both Facebook in addition to Groupon. In approximately cases, investors over react in addition to force the cost downwards far to a greater extent than than they should in addition to that is the employees seem to last fleeing from the exits. If you lot are a contrarian alongside a strong stomach, it would similar the stars are aligned for approximately bottom line-fishing simply is Groupon a buy, fifty-fifty at this discounted price?
            
            To brand this assessment, I decided to accept a aspect at my posts on Groupon from terminal year:
            
            
            1. In my basis for my pitch I made for friending Facebook inward my terminal post. In approximately cases, though, the stock cost collapse is well-deserved in addition to that is my rationale for avoiding Groupon. 
            2. Intrinsic valuations tin (and should) alter over time: There is deeply held belief, at to the lowest degree inward approximately quarters, that intrinsic valuations are stable in addition to don't alter over time. While that may last truthful inward many companies in addition to most fourth dimension periods, at that spot are 3 exceptions. The starting fourth dimension is a dramatic alter inward the macro environment. My intrinsic valuations for nearly all companies changed betwixt August 2008 in addition to Oct 2008, every bit the marketplace position cost of run a jeopardy (in the cast of equity run a jeopardy premiums in addition to default spreads) increased dramatically inward the aftermath of the banking crisis. The instant is when accounting fraud is uncovered in addition to commutation numbers receive got to last restated. The tertiary is alongside immature growth companies where the premise on which the value of growth is based - that it is scalable, defensible in addition to valuable - is called into question. It is the tertiary exception that applies to Groupon in addition to I experience comfortable lowering the value per portion from $14.82 a twelvemonth agone to $4.07 today. 

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