Groupon Inc. (Nasdaq: GRPN) Earnings Report Sends Investors Bailing on the Stock

Today's (Wednesday's) Groupon Inc. (Nasdaq: GRPN) earnings report - the first since the company went public in November 2011 - failed to show investors why they should believe in the social media-related stock.

Groupon reported a net loss before adjustments of $42.7 million, or 8 cents a share, compared to a net loss of $378.6 million, or $1.08 a share, for the same period last year. Revenue rose 194% to $506.5 million.

Groupon Stock Price History
(Nasdaq: GRPN)

Wall Street expected earnings per share of 3 cents on $475 million in sales. With profit missing expectations and disappointing investors, shares fell 12% in after-hours trading.

The lower-than-expected earnings fueled the bearish outlook on Groupon.

"True, Groupon has plenty of cash in the bank and no debt, but you can find much better tech companies out there with stronger cash flow and solid earnings," Money Morning Defense and Technology Specialist Michael Robinson said last month. "For 2012, GRPN is a tech stock to avoid."

Avoid Groupon Inc. (Nasdaq: GRPN)

Groupon has slipped about 7% since its first trading day Nov. 11 to Wednesday's closing price of $24.58. Wall Street has a one-year price target of $25.06 - a mere 2% gain from Wednesday's close.

Groupon stock, along with last year's other Internet IPOs LinkedIn Corp. (NYSE: LNKD), Pandora Media Inc. (NYSE: P), and Zynga Inc. (Nasdaq: ZNGA), got a pop from recent investor excitement over the Facebook IPO. Groupon was up 7% Feb. 2, the day after Facebook made its IPO filing. LinkedIn rose 6%, Pandora 3%, and Zynga 17%.

Regardless of a recent share price spikes, the Internet IPOs of last year still face the growth and profitability obstacles that turned investors off before.

Investors worry that customers and merchants will leave Groupon for competitors. Competition in the daily deals business has intensified since Groupon's debut, especially from Amazon-company LivingSocial.

Although Groupon's fourth-quarter subscribers rose 275% from the year before, slowing growth rates from 2011's first three quarters leave investors skeptical.

In the first nine months of 2011 Groupon brought in $1.1 billion - seven times as much as the same period in 2010 - revenue growth slowed to 9% in the third quarter from 32% in the second quarter. The number of Groupons sold in the third quarter rose only by 1% to 33 million from the previous quarter, down from a 16% jump in the second quarter.

Groupon also took a smaller cut of deal revenue in 2011's third quarter - a reduction likely taken to compete for merchants. The industry has low barriers to entry, and Groupon offers no competitive advantage to keep its subscribers from flocking to the competition.

That's why Money Morning Chief Investment Strategist Keith Fitz-Gerald has consistently voted against buying Groupon.

"I wouldn't touch it with a ten-foot pole," Fitz-Gerald said last year. "This isn't a stock for an investor looking for a long-term play with stability."

Groupon was the first of the 2011 overly hyped Internet IPOs to report last quarter's earnings. LinkedIn reports tomorrow (Thursdsay), Zynga on Feb. 14, and Pandora Feb 22.

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