Can Groupon Survive and Thrive After Earnings?

Groupon Inc. (NASDAQ: GRPN) is set to report earnings after the close of trading on Tuesday, May 6. The daily deals and discounts website has seen its share of volatility since coming public, and with shares close to $7.00, its 52-week range is $5.37 to $12.76.

24/7 Wall St. wanted to look at Groupon’s earnings expectations, as well as looking to see whether Groupon is a winner or it needs to create a living will. With a market value of $4.77 billion, it is hard to get super excited on the surface. The good news is that a living will may not be in the works either.

So, what to expect: Thomson Reuters is expecting a net loss of $0.03 per share, down from a profit of $0.03 per share a year ago. Revenue is expected to be up almost 23% to $738.4 million. For the coming quarter, estimates are $0.03 earnings per share and $754.4 million in revenue.

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Where things will start to get tricky is in how Groupon’s growth pans out from 2014 to 2015. This may be too far out for Groupon to discuss, but investors need to be thinking about this if they haven’t already. At issue is that the earnings per share are expected to rise about 150% in 2015, from $0.11 expected in 2014 to $0.27 in 2015. Meanwhile, revenue growth is expected to moderate to just under 15% in 2015 over 2014 to $3.62 billion from $3.16 billion.

Using a simple forward price-to-earnings ratio yields a P/E ratio of 64 for 2014, but this drops down to a forward P/E ratio of 26 for 2015. And all this is expected to occur when revenue growth drops by one-third to almost 15%.

Now trading near $7.01, its consensus price target is $11.12, but the range of analyst price targets is $7 to $17, according to Thomson Reuters data.

We wanted to see one of the more bullish views, but not the most bullish view, on this matter. Arvind Bhatia of Sterne Agee rates Groupon as a Buy and he has a $12 price target for the stock. He said:

We think Groupon remains an interesting turnaround story. We have maintained since our upgrade of the stock in February last year that a) a turnaround such as Groupon can take time to play out and in the interim the stock can be volatile and; b) once the turnaround is complete, top-line growth and operating leverage can be meaningful. We recommend shares of Groupon for longer term investors for the following reasons: 1) large addressable market; 2) potential for turnaround, leading to better-than-expected top-line growth and margin expansion; 3) potential for improved international performance, especially following the recent acquisition of Ticket Monster; 4) easing competition; 5) attractive valuation.

Bhatia said that Groupon has made good progress, but it has also had its shares of hiccups, such as the fourth quarter of 2013, when North America Local billings slowed to +2% year on year and when it missed expectations. Also, its operating loss in the rest of the world worsened to a loss of $15 million from a loss of $2 million.

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Sterne Agee’s revenue estimate of $725 million compares to the Street’s $740 million and to guidance of $710 million to $760 million. The firm calls the Push and Mobile efforts long-term positives but near-term headwinds.

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