At social gatherings over this past weekend, one topic dominated conversation. Those who knew or found out that I wrote about markets all had one question, what did I think of the Twitter (TWTR) IPO? Often, giving short answers to such questions to casual observers of the market can do wonders for distilling one’s own thoughts. Such was the case here; the more times I said that $20 Billion seemed like a high valuation for a company that has never made money, the more blindingly obvious it became.
Valuing potential over profitability is nothing new in the stock market. It has always been the case that investors value a company based on future projections rather than past performance. In TWTR’s case, the assumption is that the company is on the verge of finding a way to effectively monetize their popularity and fame. I am somewhat skeptical of their ability to do this to the extent that the valuation implies, or rather to do it quickly enough to satisfy investors over the next few months, but markets can be very patient with big names.
The fact is that “not as bad as expected” can be good enough for investors for quite a long time, so long as there is a continued perception of growth. Eventually, however, that patience will wear thin. There are signs that that is beginning to happen with Groupon (GRPN), another internet based sensation that is growing, but has struggled to actually make money on a consistent basis.
First the good news… GRPN is riding the mobile revolution which looks set to continue; they reported 9 million downloads of their mobile app last quarter. Their recent acquisition of the Korean company Ticket Monster increases their presence in the Asian market and offers a springboard for further growth there.
The problem with all of this is that there are signs that the market is beginning to run out of patience. Their reported Q3 earnings beat expectations, showing an adjusted EPS of $0.02 versus expectations of $0.01, but the immediate reaction was mixed. The stock jumped all over the place in the aftermarket following the news but gained around 6% the next day (Friday). Yesterday, however, much of that gain was given back in a market that was generally strong, and GRPN closed at $9.99.
As you can see, that pattern of selling into any rally is now firmly established. GRPN has shown lower highs and lower lows since the highs in late September and seems pretty well set in a downward trend.
Apart from the technical indication that the market is unhappy, I have more fundamental doubts about GRPN’s ability to grow in its core business. As the economy continues to improve, so the appeal of coupons in general diminishes for both the issuer and the redeemer. Businesses become more focused on making money than staying afloat, and thus on margins rather than just volume. For the consumer, although attitudes changed significantly following the recession, there are still a significant number of people who just don’t think of looking for a coupon before a purchase.
Neither of these factors prevents Groupon from becoming a profitable business, but they may well put a natural limit on the amount of growth achievable, even given the convenience of mobile usage. For a stock whose recovery from the lows at the end of last year has been predicated on growth rather than profit, that may present a problem.
The aforementioned purchase of Ticket Monster gives me hope that GRPN will be able to continue to grow through acquisition, and that, in doing so will begin to make money from diversified revenue streams. In the past, that hope would have been enough to give support to the stock, but it would seem that investors are looking for more immediate evidence of profitability. Until that comes, I would rather trust the trend channel on the chart above than the possibility of future revenue.
In a trendy sector such as e-commerce and tech in general, traders can be remarkably patient as a company matures. When that patience comes to an end, however, investors should take note. In the case of GRPN, I would not be a buyer until traders get what they are looking for, a sustained run of profits.