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Groupon, Facebook carry risks, say analysts

Workers Groupheadquarters 600 W. Chicago Ave. | John H. White~Sun-Times file photo

Workers at Groupon headquarters, 600 W. Chicago Ave. | John H. White~Sun-Times file photo

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Updated: June 17, 2012 8:15AM

The buzz surrounding Groupon and the frenzy over Facebook grow as they promise to change the face of Internet commerce.

Yet some analysts point to warning signals that should temper the growing exuberance both are enjoying.

Groupon’s earnings report Monday drove its share price higher before, during and after its release, with it gaining more than 18 percent in after-hours trading and as high as 16 percent Tuesday. But Groupon’s stock closed up a more tempered 3.7 percent, or 44 cents.

Facebook, already expected to have the largest-ever initial public offering for an Internet company, increased the planned price range for its stock to $34 to $38 per share in a filing with the Securities and Exchange Commission on Tuesday — up from its previous range of $28 to $35.

The move values Facebook as high as $104 billion, amid growing investor excitement about the offering.

Groupon’s initial euphoria came late Monday after the company, headquartered in the old Montgomery Ward catalog warehouse, reported first-quarter sales grew 14 percent from the fourth quarter; marketing expenses fell to 21 percent of revenues from 50 percent in 2011; revenue skyrocketed 89 percent to $559.3 million, beating analysts’ forecasts, and its merchant tally topped 100,000 for the first time.

Groupon and its 31-year-old CEO Andrew Mason, a music major at Northwestern University, don’t forecast when the company might turn a profit.

Skeptical analysts lowered their share-price forecasts on Tuesday in part because of the many uncertainties surrounding what some call the fastest-growing company ever:

†Costs of Groupon’s growing sales and corporate workforce will stay high.

†The issue of the company’s repeated financial restatements and disclosure of a “material weakness” in its financial controls remains.

†Groupon’s ideal of becoming a personalized deal site with more on-the-spot smartphone offers and a platform servicing mom-and-pop retailers’ technology needs is just that: an ideal.

Indeed, some of the financial details remain unknown, too.

“They don’t give enough information on the numbers, so it’s tough to quantify where the numbers are coming from,” said Herman Leung, an analyst at Susquehanna Financial Group. “My guess is that the newer products, such as location-based Groupon Now offers and repeat-customer incentive Groupon Rewards, haven’t taken off as quickly as the company had expected.”

Two other factors weigh on Groupon: Customer fatigue of getting bombarded with daily email deal offers and significant competition from would-be copycats.

Leung said he considered the first-quarter results a step in the right direction, but he would have to see more quarters of “more sustainable growth.” Leung maintained his “neutral” rating and lowered Groupon’s price target to $15 from $25.

Sameet Sinha of B. Riley & Co., which also has a “neutral” rating on Groupon, said the most obvious question after the latest quarterly results is: How sustainable is it?

“Maybe it’s a one-quarter thing,” he said. “Yes, Groupon reduced its marketing spending, but maybe next quarter, that will have an impact. Perhaps if people don’t see Groupon’s ads for a couple of months, it may slip into the back of their minds.”

Groupon also faces competition from stalwarts Google and Amazon, in addition to smaller rival Living Social, Sinha said.

Just weeks ago, Living Social killed its last-minute, location-based deal service and replaced it with a service that lets restaurants offer real-time takeout and delivery service.

Furthermore, Groupon’s effort to expand into providing services for merchants could fail, he said.

“Whether or not it succeeds or fails is tough to say,” he said.

Groupon’s 52-week low is $9.63. It closed Tuesday at $12.17 — 40 percent below its opening IPO price of $20.

Facebook, whose initial public offering may be “the most wanted IPO ever,” Sinha said, faces its own questions. The company admits it doesn’t yet know how to make money off of its mobile offerings, and the Wall Street Journal reported Tuesday that General Motors plans to stop advertising on Facebook after figuring out that the ads didn’t have much impact.

“People get scared and say, ‘Oh, no, is this another Yahoo?’ ” Sinha said. “In the good old days, we thought the leaders were Yahoo, Amazon and eBay. Then came Google and then Facebook. Who knows? Perhaps Twitter will be the next Facebook.”

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