Then came the emails with people asking me whether or not they should buy Groupon stock. While it’s definitely possible to scalp the stock off to a “greater fool”, I am now short.
It’s trading at 53X forward earnings. This is just too high. People buy stocks based on future earnings and growth estimates, but I see very little room for the company to grow. There’s nothing in Groupon’s business model that can’t be easily replicated. Of course there’s the “brand name” factor, but at the end of the day, I believe that customers are going to Groupon for deals. If a copycat company can build a decent subscriber list (and some already have), it will eat away at Groupon’s earnings.
Groupon’s product is suffering. I’ve paid close attention to how Groupon has evolved (or devolved) since its IPO and I do not like what I see. More and more “deals” are around 50% off, which isn’t really a deal to begin with. Sometimes shipping is double the normal rate! A few months ago my email client actually started filtering Groupon as spam. I’m inclined to believed that thousands of others view Groupon as spam too.
The stock has been in a long-term downtrend (kind of). While I’m not too much of a technician, it’s easy to see that the stock isn’t at the $20-something level that it once was. From November 2011 to November 2012, the stock lost 90% of its value. It more than tripled in the following year and then proceeded to fall again. With Friday’s pop, the 50-day moving average surpassed the 200-day moving average. Perhaps some technical traders will combine this with other indicators and become bullish. Even so, the three-month chart shows a resistance level of around $8.30. If I were going long, I’d put my stop below $6.83.
Price/Tangible Book is too high. A P/TB of 31.90 is a nail-biter. Groupon doesn’t really have any factories or anything “tangible” that could be sold. Even though I openly acknowledge that Groupon has no debt (which a huge advantage in my eyes), there’s nothing that can be liquidated for fast cash or shareholder value.
One of the biggest worries I have about shorting Groupon is the possibility that a huge company such as Apple or Google will acquire it. This would likely drive the price higher and higher as buyers rush in to get a piece of the action. There’s always the possibility that the market could stay irrational longer than I can stay solvent.