Groupon: Why Valuation Might Be A Concern At Current Levels

The last time I mentioned Groupon (GRPN) I told you the smart money was selling the stock (please consider: Groupon: The Smart Money Is Selling The Stock). While Groupon registered higher price action since that article, nevertheless it does not change my thesis about the company, and that is, the smart money is selling because Groupon is overvalued.

Groupon, like many Internet stocks such as Zynga (ZNGA) and Angie's List (ANGI) have benefited from some sort of social stock craze that is going on in this market. However, eventually the market comes to its senses and marks down the excess price of stocks accordingly.

And while many stocks or sectors can remain extremely expensive for a very long time -- giving the impression that this is the "new norm" -- eventually what comes around goes around and investors learn their lesson the hard way.

Groupon is now getting into the coupon business. While it may be a small change to its business model, I consider the coupon business similar to the business that Groupon is already in, the deals business.

However, entering a new business is not an easy thing to do and requires a lot of upfront costs. And if you already don't make any money, as Groupon is not making, then the question is how much of a loss will you report next quarter and if your stock is overpriced as is?

(Click to enlarge)

GRPN Revenue (Quarterly) data by YCharts

As the data above shows, Groupon is still not making any money and has had zero revenue growth over the past several quarters. And since the coupon business is already a crowded business, with heavyweights such as Google (GOOG) and Amazon (AMZN) in the space, not to mention RetailMeNot (SALE), the question is if Groupon will make any money in this business or if it will only lose money.

That is the reason why I think Groupon fell over 5% Friday and is also falling today. In fact RetailMeNot also fell over 3%, as a sign that more competition in the space will mean tighter margins.

But Groupon has a lot of cash in the bank and can afford to experiment and lose some money to get in the game. It will not go out of business because it is entering the coupon business.

So at the end of the day it all comes down to valuations as I have said many times. The question investors have to ask themselves is if Groupon is worth $6 billion when it cannot make any money and when growth seems harder and harder to find. Also, if the stock worth holding onto at these levels. My answer to both questions is no.

Source: Groupon: Why Valuation Might Be A Concern At Current Levels

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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