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Groupon looks for next step after stock freefall

Groupfounder CEO Andrew Mas/. Scott Stewart/Sun-Times

Groupon founder and CEO Andrew Mason /. Scott Stewart/Sun-Times

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Updated: September 16, 2012 6:14AM

Groupon swung from a loss to a profit in the second quarter. Its revenues grew. But signs that growth is slowing rattled investors who are holding a stock that, after Tuesday’s freefall, has lost nearly three-quarters of its value since it went public last fall.

Experts say Groupon can no longer rely on daily deals as a growth engine, with so many deals available and the feeling consumers are getting tired of them. Aside from making its accounting process more open, Groupon needs to find profitability in a fast-growing product such as a mobile offering that doesn’t require loads of inventory and convince people to do more business with local merchants.

Groupon’s stock spiraled down Tuesday, dropping 27 percent to close at a record low $5.51 a share — 72 percent below its initial public offering price and about 40 percent of the value of Google’s $6 billion takeover offer, which Groupon rejected in December 2010.

The market punished Groupon a day after the company’s disappointing earnings report showed that it won’t report better news for the quarter under way. At least two brokerages downgraded Groupon and six analysts cut their price targets. But six of 23 Wall Street analysts who track Groupon advise investors to buy, according to FactSet.

Lou Kerner, founder of the Social Internet Fund, a New York-based investor in fast-growing social and mobile tech companies, said Tuesday that Groupon should focus on the fast-growing mobile market.

Edward Woo, senior research analyst at Ascendiant Capital Markets in Irvine, Calif., said Groupon should focus on growing its business profitably and ignore the stock price, since it has no immediate need for cash.

For now, CEO Andrew Mason and co-founding investors Eric Lefkofsky and Brad Keywell control 57.4 percent of the company’s stockholder voting power and were “the big winners” by cashing out millions early on, so “there isn’t a lot shareholders can do other than complain,” Woo said.

Citigroup’s Mark Mahaney said while the daily deal business is “sharply slowing,” investors are left to wait to find out whether Groupon’s local mobile e-commerce platform or other initiatives will succeed.

The stock-price plunge also tells Groupon that time is short, the experts said.

“The plunge in Groupon’s share price is the shareholders’ way of telling Andrew Mason to step aside and bring in seasoned professional management,” Kerner said.

Kerner told the Sun-Times in July that money managers who invest day-to-day “struggle to take Andrew Mason seriously.”

Woo doesn’t see Mason stepping down any time soon, and he said even a new management team might not be able to fix the slowing daily deals business.

Yet analysts noted that Groupon generated $330 million of free cash flow in its second quarter, generated $568.3 million in revenue and $28.4 million in net income, and its Groupon Goods business of selling jewelry, movie tickets and other discounted products helped boost revenue 45 percent.

Groupon Chief Financial Officer Jason Child told analysts on Monday’s earnings call that the company “wants to give ourselves room to make the appropriate investments.”

Groupon’s shareholders’ stakes reflect the ambiguity.

Goldman Sachs and Fidelity Investments bailed out, but T. Rowe Price, an early Groupon investor, bought 24.4 million shares between March 31 and June 30, according to a Morningstar analysis.

Indeed, experts point to Amazon and Priceline as examples of earlier dot-com companies that came out strong, dropped precipitously and turned around with a vengence.

“I don’t think Groupon will go out of business, but (the company) may just have to accept a valuation near-term that is much less than it previously had — $3 billion is still a great value, as long as you don’t compare it to $20 billion,” Woo said.

Groupon could yet be takeover bait again, too.

“Groupon’s customer list remains its prized asset, coveted by companies like Google,” Kerner said.

Woo said a value investor or strategic company wouldn’t be interested in taking over Groupon unless the stock price collapsed to less than $2 a share.

Possible strategic investors at that point include Google, Amazon and eBay, but he said “no clear concrete buyer” is apparent because the market is full of daily deals companies.

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