Groupon Fatigue

Whither Groupon? A Wall Street Analyst Breaks It Down

They've still got a few wrinkles to iron out.
39cb4c1 Whither Groupon? A Wall Street Analyst Breaks It Down

Mr. Rohan (LinkedIn.com)

The fate of Groupon has been a topic of intense interest on this blog. So how fares the discount diva these days? According to one Wall Street analyst speaking yesterday to the Daily Deals Summit, the long-term future might be bright, but she’s likely to break a few more hearts first.

Stifel Nicolaus managing director Jordan Rohan introduced himself by explaining that he’s basically the Methuselah of internet stock analysts. Having started in March 1999, “I’ve covered eons of internet business models,” he informed the crowd.

That means he watched the first internet bubble explode like over-microwaved leftovers, offering some important context for understanding Groupon’s stock troubles.

First, some numbers: The company took in $4 billion in gross billings in 2011, with a take rate of about 40 percent. They’ve got more than 50 percent market share (according to Mr. Rohan’s numbers, via Yipit.) The stock briefly topped out at $31/share, making for a $20 billion market cap. That put Groupon in the rarefied company of perhaps 10 or 12 other internet companies, Mr. Rohan explained, and those “were some very high expectations.”

Unfortunately, those expectations were maybe a little heated. Just a couple of weeks ago, Groupon had to revise its first quarterly earnings report to reflect higher-than-anticipated return rates. Rohan walked through some of those numbers, suggesting growing pains as the company experiments with its business model. Higher-value items–laser hair removal and vacations, as opposed to burritos and magazine subscriptions–are more likely to be returned. (Which makes sense.) They’re still working toward the right cocktail of satisfied consumers, happy merchants, and fat margins.

But there were consequences: “This is just inexcusable from the perspective of Wall Street analysts,” Mr. Rohan admonished. Groupon now has a market cap around $7.5 billion, a third of its peak value.

In short, he explained, the company is following a well-trod path from hype to disillusionment. That’s a rough period for investors and entrepreneurs, but it doesn’t necessarily mean the stock is doomed forever. Mr. Rohan said it’s typical for companies to lose around 80 percent of their value in this bleak adjustment period. In fact, he’s even optimistic about the long term: “The company will figure out its business model during this period of disillusionment,” he said, adding:

“There will be a brighter day in the future. I’m not so sure in the near term for the stock–I wouldn’t own shares today–but I can see as the facts change, as we clear out of this period of disillusionment, that it will stabilize and turn higher in the future.”

Of course, that leaves the question of what that improved business model will look like. But those aren’t exactly reassuring numbers for a certain enormously-hyped social network scheduled to make its own IPO debut.

Follow Kelly Faircloth on Twitter or via RSS. kfaircloth@observer.com