The share price of Groupon (Nasdaq:GRPN), one of the pioneers in sending deal-of-the-day emails with a special offer from a local merchant, performed dismally during 2012. The stock started the year at just above $19 per share but ended at less than $5, or about half the cost of a common daily deal it usually sends to subscribers. This represents an astounding annual drop of around 75%. Cut-throat competition and a business model that can easily be copied by competitors are definitely to blame and are on top of skeptical investors' minds. The share price drop is even more dramatic from the nearly $26-per-share level that it traded at just after Groupon completed its initial public offering (IPO) in late 2011.
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Mason on the Hot Seat?
The dramatic drop in investor enthusiasm over Groupon's forward prospects might seem to jeopardize company CEO Andrew Mason's job. If Groupon's fundamentals start deteriorating rapidly or if the share price continues to plummet, this could end up being the case. For a number of key reasons, however, Mason's job looks to be secure for the time being.
The biggest factor suggesting Mason will remain firmly entrenched as CEO is that he and fellow co-founder Eric Lefkofsky hold a significant amount of voting control of Groupon's stock. When Groupon went public, it issued two classes of stock. The B shares allow 150 votes per share, as opposed to the A shares that allow just one vote per share. Based on Groupon's most recent proxy statement filed with the SEC, Mason holds 19.5% of the company's voting control and Lefkofsky holds another 27.7%. This stems primarily from the fact that each individual holds 41.7% of the supercharged voting abilities of the B shares. Only one other individual holds any B share. In this respect, barring a disagreement between Mason and Lefkofsky, Mason controls his own destiny in regard to staying at the helm of the firm he helped build.
Still Room to Grow
Additionally, there can be big differences between how a company's stock performs and the underlying fundamentals of its business. And based on sales projections for the next couple of years, Groupon will grow rapidly. Analysts currently expect outstanding sales growth of almost 44% for all of 2012 and a very respectable 18% increase during 2013. Sales could reach $3 billion by the end of 2013, if Groupon can beat expectations by a modest margin. This would indeed be an impressive growth for a business model that rivals including Google (Nasdaq:GOOG), Social Living and many regional competitors are copying with their own websites and list of email subscribers. In this respect, Mason appears to be doing a great job of leading the company.
Groupon is confident it can continue to grow, as indicated in a recent presentation to investors. It estimates a market share of only 0.2% of a $3-trillion market for local commerce across the globe. It estimates 250,000 local merchants and boasts more than 200 million subscribers, though only 40 million actively pick up its daily deals. In the third quarter of 2012, it detailed that customer-acquisition costs and marketing spending each fell by more than 50%. This has been a major concern among bearish investors who believe Groupon is spending too heavily to generate activity for its merchant deals.
Groupon also listed quarter-end cash of $1.2 billion and no long-term debt. This provides quite a cushion as the company pursues consistent profitability. To achieve solid profit growth going forward, Groupon will look to grow internationally and continue to build its sales force to capture local market interest. Analysts expect modest profitability of 17 cents per share for all of 2012, but estimate it to increase to 24 cents per share for all of 2013.
A Strong IPO
Returning to the share price discussion, the fact that investors were comfortable snapping up its stock during the IPO at a very rich valuation is not Groupon's fault. The stock still has lofty expectations built into it, as evidenced by a P/E ratio of nearly 30 and a current market cap of $3.3 billion, but is much more reasonably valued compared to the IPO price or the stock price at the beginning of 2012. This could end up helping Mason, as long as the company continues to grow and boost its profit margins.
The Bottom Line
Despite waning investor enthusiasm for Groupon's business prospects growing forward, CEO Andrew Mason's job looks to be secure. For starters, he controls his own destiny and is highly unlikely to be fired by his co-founder friend or a board that has little voting control in the company. Groupon's growth prospects, at least based on recent business trends and analyst estimates over the next couple of years, also appear to be decent. Given these factors, Mason will likely remain at the helm of Groupon for the foreseeable future, though its business model will likely be hard to defend over the long haul.
At the time of writing, Ryan C. Fuhrmann did not own any shares in any company mentioned in this article.