Groupon Earnings Deliver One Takeaway: Don't Buy GRPN

Groupon earningsIf Groupon earnings confirmed one thing, it's this: stay away from GRPN stock (Nasdaq: GRPN).

The deal-a-day giant generated $757.1 million in quarterly sales, 27.2% growth from last year's third quarter. The e-commerce company also posted a loss of $21.2 million, compared to last year's $2.5 million loss, for a loss-per-share of $0.03, worse than last year's earnings per share (EPS) of $0.00.

GRPN beat Wall Street's top-line sales estimates, which projected 25.8% growth, but missed on the bottom-line EPS expectation of $0.01.

Those numbers mean nothing against the larger picture though.

Here are some more important numbers:

  • This is GRPN's ninth straight year-over-year quarterly loss. It hasn't posted a profit since Q2 2012.
  • GRPN added another $21.2 million to its deficit. This debt figure is slowly approaching $1 billion, currently at $930.8 million.
  • Its price-to-earnings is undefinably high due to its consistent negative earnings. This is saying a lot for an industry that already has an average P/E ratio of 45.2, according to Morningstar.
  • GRPN stock is down 49.1% on the year, and 78.6% since its overhyped IPO in Nov. 2011.

And simply put, it's not a good business.

Here's why...

GRPN's Parasitic Business Model

GRPN aims to provide exposure for its business partners - merchants selling discount vouchers for their goods and services.

Through these discounts, the e-commerce company can supposedly put a business' name out there and give it a new pool of clientele to which it can offer goods and services.

It doesn't work this way.

The common criticism is that a Groupon voucher doesn't help generate a profitable stream of loyal customers, only discount seekers looking to make a one-time purchase.

In fact, as skeptics have noted there's no shortage of horror stories from local businesses that have tried to use GRPN's services, but only suffered losses by selling their goods and services at an unsustainable discount.

Since GRPN promotes price over quality, Groupon users look for deals, not to build a relationship with the vendor.

Groupon's failure to help businesses generate customer loyalty is where the company falls flat. Essentially, GRPN leeches off the goods and services of other businesses to build loyalty for itself.

And this ineffective, parasitic business model is why GRPN stock trades about 70% below its $20 IPO price.

Don't Fall for GRPN

Money Morning Chief Investment Strategist Keith Fitz-Gerald warned investors when GRPN first hit the market that he "wouldn't touch it with a ten-foot pole."

"This isn't a stock for an investor looking for a long-term play with stability," he wrote to Money Morning Members.

Trendy companies like Groupon tend to disappoint because they are more flash over substance.

"The next best thing is always a click away," Fitz-Gerald said.

Long-term stable plays meet three criteria: a strong global brand, ironclad balance sheets, and the ability to deliver on real needs and capitalize on unstoppable trends.

Strikes one, two, and three for GRPN.

Combine that with GRPN's much-maligned business model and you have even more reason to put your money elsewhere.

Any boost to GRPN's stock price will be misled buying, not sustainable growth.

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]

"Stocks like this continually amaze me because they are no different than any of the hype-driven Internet darlings during the dot-bomb crisis in late 1999 to 2003," Fitz-Gerald said. "There's very little behind the concept of social marketing save a few individuals who somehow think 'social' media will drive everything."

More on Investments to Avoid: GRPN isn't the only dud in the stock market. In fact, a money manager quoted in the Wall Street Journal gave one of our experts the worst investment advice he's ever heard! Here's our Defense and Tech Specialist Michael Robinson with how to counter this "advice" from Wall Street...