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Groupon (GRPN) Earnings: What Went Wrong?

Jeff Macke
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Welcome to the big leagues, Kid.

Groupon (GRPN) released its first ever quarterly earnings report since going public in November, and immediately last night shareholders voted with their feet, sending the stock down over 15% after-hours. The company recorded a loss of 2-cents per share versus estimates for a $0.03 gain. Groupon attributed the loss to an unexpected tax hit and assorted one-off charges.

Is the Street overreacting? Is Groupon experiencing genuine growing pains? Is it a little bit of both?

In the attached clip my co-host Matt Nesto and I search for the truth. With the stock slightly lower than the last time Nesto and I hammered it out, I gave him the honor of defending the name.

"The punishment may not fit the crime here," says Nesto, noting that the stock lost $2.5 billion of market cap for a $42 million earnings miss. The sell-off is classic Wall Street knee-jerk reaction he concludes; a mere equity hiccup on the road to investing nirvana.

I'm less sanguine. It's a Wall Street no-no for newly traded companies to miss their first quarter expectations. It says they can't control their business. Estimates were raised going into GRPN's quarter and the stock was up 25% in February alone.

Buyers were burned. Groupon CEO Andrew Mason isn't Steve Jobs. He won't get the benefit of the doubt if he ignores shareholders.

My real concern though is a 22% drop in their marketing costs. The company says the drop is due to more efficient ad spends. I say the company is valued at over $450 per user and has only 33 million of what they call "active users" (defined rather generously as anyone who's purchased something from GRPN in the last 12 months). Groupon is priced to grow but acting like they've fully penetrated the consumer psyche, despite a customer-base heavily concentrated on the young. Not good.

So that's where Nesto and I stand on the company but we still have limited information. To help get my arms around how Groupon is going about building loyalty and driving its business off existing customers, I've created what I'm calling "Macke's Groupon Challenge."

I created a new email account dedicated solely to Groupon transactions. I used the pristine account to create a Groupon ID and made a single purchase: a magenta Slanket. As far as Groupon knows I'm a 50-year old male who enjoys a good snuggle.

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The game is afoot. Loser wears the slanket the next time we discuss the stock.

Will Groupon justify my love or spam my fictional snuggle-lover within an inch of his life? Let us know what you think is going to happen and where the stock is headed in the space below or Tweet me @Jeffmacke

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