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Groupon stock plunges on growth worries

2012-02-10 11:03

New York - Groupon had a lot to prove with its first earnings report as a public company. The nearly 14% slide in its stock on Thursday suggests investors were not impressed.

The online deals site on Wednesday reported sharply higher fourth-quarter revenue that surpassed Wall Street's expectations. But some analysts worry about the trajectory suggested by its revenue forecast of $510m to $550m for the current quarter.

The guidance means Groupon expects revenue to grow by about 5% in the first three months of this year, compared with the last three months of 2011. By that same measure, revenue grew by a double-digit percentage in each quarter of 2011. That suggests growth is slowing down, said Collins Stewart analyst Mayuresh Masurekar.

Groupon's growth from signing up more subscribers and adding to its list of merchants is slowing, Masurekar said in a note to investors.

Chicago-based Groupon is expanding abroad, sending subscribers coupons personalised to their tastes and offering new types of deals, but growth from those initiatives may not be enough to counteract its slowing daily-deals business, Masurekar said.

Discounted deals

Groupon makes money by sending its 33 million subscribers discounted deals on restaurant meals, manicures, gifts and a broad range of other offerings and taking a cut from what merchants take home.

The company posted an adjusted fourth-quarter loss of 2c per share, in large part because of unusually high international taxes. Analysts were expecting a profit of 3c per share

Its revenue grew 18% from the third quarter to the fourth, to $506.5m. It was helped by strong holiday demand and special deals the company offered as part of its Grouponicus promotion, dubbed as Groupon's "wintertime celebration".

Revenue increased 10% from the second quarter to the third and 33% from the first quarter to the second.

Still, Masurekar, along with other analysts, said Groupon's latest results were solid. Analysts don't suggest selling the stock, just waiting to see whether the company can show it can keep growing fast.

Morgan Stanley's Scott Devitt kept his rating on the stock as "Equal-weight", which means the analyst thinks the stock will trade in line with other industry stocks he covers.

Groupon, he said kept its competitive position, grew revenue while reducing marketing costs and showed no signs of "customer deal fatigue". Morgan Stanley was the main underwriter of Groupon's IPO.

Business model

Concerns about the sustainability of its easy-to-copy business model have dogged Groupon since before its November PO.

Though its early growth was meteoric, rivals quickly popped up. And it drew scrutiny from the Securities and Exchange Commission for the way it accounted for revenue in an early filing. The company restated its numbers to count as revenue only what it takes home, not the full amount that people pay for its deals.

Groupon has also been spending heavily on marketing to gain new subscribers and on hiring new workers at a frantic pace. It had about 10 000 employees as of late 2011.

After pricing its IPO at $20, Groupon's stock has fluctuated between $14.85 and $31.14. On Thursday the stock fell $3.41 to close at $21.17.