Why Playing Groupon’s Akin to Betting

Internet related stocksInternet-related stocks are not an easy place to make money. Just ask Facebook, Inc. (NASDAQ/FB), which has seen its share price plummet from $45.00 on its Initial Public Offering (IPO) day to the current $20.00 level. (Read “The Next Big Chinese Play.”) There’s also streaming video provider Netflix, Inc. (NASDAQ/NFLX) trading at $60.00 on Tuesday after surging to $245.34 a year ago on August 16. Investors demand results from high-flying stocks and will punish overpriced companies that fail to deliver superlative growth.

The latest casualty of the downward spiral in Internet stocks is Groupon, Inc. (NASDAQ/GRPN), which cratered over 20% to a record low at below $6.00 on Tuesday, after a revenue shortfall of $7.0 million in its second-quarter earnings reports. This may not seem like much, as the company reported $568 million in revenues, up 45% year-over-year, but the market view was for much better results. Groupon was wishy-washy towards its third quarter with revenues expected to come in between $580 million and $620 million; this is quite a wide range that poses plenty of uncertainty for traders, but also is an investment opportunity. Groupon makes about 60.5% of its revenues from outside theU.S., and given the dismal situation inEurope, this makes the stock a risky investment opportunity.

I’m not ready to write off Groupon, and I see a potential investment opportunity here, but you need to make this decision for yourself.

Those looking for a high-risk investment opportunity may want to take a look at Groupon, known for its daily deal offerings for a broad range of goods, services, and travel. Groupon will sell almost anything as long as it’s legal.

The purpose of the company and the way it makes money is to hook up merchants to consumers via a local commerce marketplace that caters to goods and services in your immediate area. Groupon doesn’t charge a fee for joining and simply makes money from merchants and how many deals are sold.

The big risk that is now appearing is the inconsistency of revenues and the fact that there are numerous rivals emerging that offer or will pose a threat to Groupon’s business, but I still see a possible investment opportunity.

Since its initial $658 million IPO on November 4, 2011, at $20.00, the stock traded to as high as $26.19 on November 18, 2011, prior to declining to the current $6.00 level.

There are lawsuits that allege Groupon has not been truthful in its communications to investors. On March 30, the company shocked investors after a downward revision in its fourth quarter and 2011 results. The concern was that the revision was made so soon following the IPO that it suggested there may be accounting and reporting issues down the road.

As such, the investment opportunity risk is high, especially if Groupon is found to have additional internal control issues.

Groupon should only be viewed as a contrarian investment opportunity at this time, but the stock could surge if there aren’t any further surprises and if the company can fend off rivals.

The investment opportunity is that revenues are estimated to rise 46.9% to $2.4 billion in 2012, based on 22 analysts’ estimates, followed by 26.9% growth to $3.0 billion in 2013.

Annual earnings are estimated to come in at $0.18 per diluted share in 2012, up from a loss of $0.72 per diluted share in 2011, and rise to $0.65 per diluted share in 2013.

Watch the short position of 55.2 million shares or 26.6% of the float as of July 31. If the stock rallies, expect to see short-covering and an investment opportunity in the stock. Please note that this is only an example of a type of investment opportunity in Internet-related stocks right now, not a recommendation to buy.