Shareholders of Groupon (NASDAQ: GRPN) on Wednesday will get their first reality check since the daily-deals site went public in early November when the company announces its fourth-quarter earnings.
Groupon's November 4 IPO followed months of questions from the Securities and Exchange Commission regarding how the deals site counts revenue (it was overstating net revenue) and some "quiet period" gaffes by top executives.
The real concern for analysts and observant investors, though, was that Groupon seems to be showing signs of slowing growth even as it continues to lose money.
That's an unenviable situation, to say the least. Investors generally are more willing to tolerate short-term losses if they see expanding growth opportunities; in other words, they genuinely believe a company can grow into profitability.
Investors also are more willing to forgive slowing growth (at least partially) if a company consistently posts a healthy profit.
Groupon has neither expanding growth nor a positive net income. In the third quarter of 2011, Groupon had $430.2 million in revenue, up 9.6% from $392.6 million in the second quarter. But the sequential quarterly growth rate before that (Q1 to Q2) was 32.8%, and from Q4 2010 to last year's Q1 it was 71.6%. As far as Groupon's revenue goes, the sky is not the limit.
Which means the company has to begin controlling spending at some point to show a profit. That's not likely to happen any time soon. Groupon reported net losses of $389.6 million in 2010 and $214.5 million in the nine months ended September 30, 2011, respectively.
Further, it said in a filing with the SEC that "we anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our subscriber base, increase the number and variety of deals we offer each day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform."
Groupon said it spent $466.5 million "on online marketing initiatives relating to subscriber acquisition for the nine months ended September 30, 2011." Of course, along with merchants, subscribers are the lifeblood of Groupon's business model. But the company is generating less money per subscriber, a sign of diminishing ROI: Average revenue per subscriber dropped to $11.60 in the first three quarters of 2011 from $12.10 in the same period in 2010.
Shares of Groupon were up 14% this year to 23.51 through Monday's close, but overall the stock has done nothing to remind Wall Street of the first Internet Gold Rush. After pricing at $20, shares briefly topped $30 in the November 4 IPO before plunging below $15 by the end of the month.
Groupon shares got a boost over the past week from the news surrounding Facebook's IPO -- for absolutely no rational reason, by the way -- to as high as 24.90.
The average revenue forecast from analysts calls for Groupon to log revenue of $473.1 million in the fourth quarter, which would represent about 10% sequential growth, meaning Groupon's revenue -- at least for now -- is plateauing.
It's hard to imagine that being well-received by Wall Street. Unless Groupon blows out that rev forecast and/or delivers an earnings surprise, look for the Facebook halo effect that has lifted shares nearly 20% in just a few days to rapidly dissipate.