What a difference a decade makes. Unlike the "what, me worry?" attitude that dominated the prior tech bubble, investors seem considerably more interested in the immediate financial performance of companies like Facebook (Nasdaq:FB) and Groupon (Nasdaq:GRPN). With Groupon once again disappointing the Street, it looks like management needs to rebuild its credibility with institutions, even if the long-term growth story looks interesting at these prices.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Second Quarter Results Feed Bulls and Bears Alike
By no means did Groupon report a clean second quarter, but then again neither was it a disaster.

Revenue rose 45% as reported (about 53% in local currencies), missing estimates slightly on disappointing international growth. Although the take rate (the percentage of billings that Groupon recognizes as revenue) increased for the third straight quarter, billings posted a sequential decline (down 5%) and the active customer count increased just 3% from the first quarter.

Profitability was mixed. Gross margin dropped about two and a half points sequentially. Consolidated segment operating income (or "CSOI"), a weird financial metric that Groupon invented, came in at $72 million and also missed expectations. Although lowering marketing spend ought to have helped margins, the larger contribution of Groupon Goods (with its lower margins) didn't help.

SEE: Understanding The Income Statement

Guidance Calls For More Pain
Investors clearly didn't like what Groupon management had to say about the near future. Calling out badly-chosen deals as a contributor to disappointing international revenue, it looks like marketing expenses will have to head higher again. That is going to lead to some pretty significant (roughly one-third) cuts to CSOI expectations for not only the next couple of quarters, but likely for the out years as well. If nothing else, it seems as though analysts are moving more strongly to a "show me" attitude about this company.

The Need Is There, but What About the Competition and the Model?

I like the basic premise of what Groupon offers - it gives merchants a low-risk, theoretically high-volume means of acquiring new customers. Better still, it's a clearly measurable way of acquiring those customers. I also like the company's strong position in mobile, with roughly one-third of the company's transactions already occurring that way.

But while the service that Groupon offers may be necessary, that doesn't make it easy. Facebook, Yelp (NYSE:YELP), and OpenTable (Nasdaq:OPEN) have already backed away, and bears seem convinced that the market is there for the taking by Google (Nasdaq:GOOG) and Amazon (Nasdaq:AMZN). To that end, decelerating billing and revenue growth and lower margins don't offer a strong counterargument.

There are going to be some familiar bear themes repeated around Groupon. Can the company maintain adequate merchant satisfaction (perhaps already an issue in Europe)? Is the business model sustainable, and/or will the company ever be able to lower its marketing spend and leverage its margins? Will LivingSocial beat them at their own game?

The Bottom Line
I went into this expecting not to like Groupon and to find very little (or nothing) of substance to the model. I was surprised, though, to see just how much skepticism surrounds this name. I can understand the long-term margin worries, and I do share them, but I think the opportunity in customer acquisition is both real and large.

SEE: 5 Must-Have Metrics For Value Investors

You can get a double-digit fair value target on Groupon with a low-teens forward free cash flow growth estimate, which is quite a bit less than investors assume for the much-larger Amazon. There's certainly the risk that competition smothers Groupon's ability to grow its revenue and/or improve its margins, but it's pretty clear to me that today's valuation doesn't assume all that much future success for Groupon and patient bulls may get the last laugh here.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center