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Will Groupon (GRPN) Groupon Itself?

 December 10, 2012 02:22 PM

(By Rich Bieglmeier) Groupon's (GRPN) stock rocked on rumors that Google (GOOG) was interested in making a second offer to buy the online coupon company. On the speculation, GRPN shares jumped from $3.81 to $4.69 from Thursday's to Friday's close.

Today, Groupon is taking it on the chin like Manny Pacquiao, down more than 7% on heavy volume. According to Business Insider, Google is most likely not buying and founder Andrew Mason hasn't been fired, disappointing investors on both fronts.

Friday's action made Groupon one of the most accumulated stocks with $41 million – 1.35% of the company's market-cap – flowing into buy tickets. Traders bid the stock beyond GRPN's 50-day average of $4.23. While today's sell-off isn't welcome news, the fact that GRPN remains above the key trend-line is a ray-of-hope that rumors could still be pre-mature facts.

[Related -Google Inc (GOOG) Q4 Earnings Preview: What To Watch?]

A couple of years ago, the search giant tried to buy GRPN for $6 billion, but the deal was rejected. Oh, how nice a do-over would be right about now.

iStock believes Groupon does have an attractive business. Let me share a conversation I once had with a high up at Groupon in an American Embassy somewhere outside of the US. I was told the company's has staff on the ground, unlike many of its competitors. The person explained that, unlike Americans, many people in other countries are very uncomfortable doing business over the phone; that the local hairstylist requires a visit from the salesperson to get the discount online.  This is important because 53.4% of our revenue comes from Groupons's International segment, compared to 46.6% from the North American segment.

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The strength of the business is not the discount model, anybody can do that; rather, it's the salespersons' network of face-to-face relationships that makes Groupon different than its competitors. Any suitor would be buying the client lists and relationships, not necessarily the "business." Google, or any other potential social site suitor, doesn't have the handshake ability of Groupon, and that's why GRPN may struggle, but will survive.

You can see GRPN's healthy heartbeat in their sales. For the nine months ended September 30, 2012, revenue was $1,696.2 million, compared to $1,118.3 for the same time frame in 2011. However, debt stood at $672.5 million as of September 30, 2012; although, growth in the recent quarter decelerated to 32% from the none-month pace of 51%.

For 2013, analyst expect the coupon company to grow earnings by 41%, which is much slower than its triple digit history, but still well ahead of the company's forward P/E of 18. The street sees revenue growing by 18% in the year ahead, putting the sales' consensus at $2.75 billion. Meanwhile, Groupon's current market-cap is $2.83 billion. In less than a year, GRPN shares could be trading for with a price-to-sales (P/S) ratio around 1.

iStock broke out the trusty stock screener to see how many companies are expected to grow sales by 15% or more and profits by 35% or more in the year ahead. We found 406 and on average they trade for 6.36 times sales, well ahead of Groupon's current P/S of 1.40.

We do believe Groupon's (GRPN) is an attractive buyout candidate for the likes of Yahoo (YHOO), Facebook (FB), Google (GOOG) and other social sites; however, iStock believes it is likely they'll reject a $6 billion offer, again. In the same embassy conversation, it was made clear many dollars ago that management believes the company's future is worth more than that, despite their ongoing problems.



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