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Groupon Slumps as ‘Daily Deal Fatigue’ Overshadows First Quarterly Profit

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Groupon (GRPN) shares continue to fall Tuesday morning after a disappointing second quarter earnings report sent the stock price to a new low in after-hours trading Monday. Most recently the stock was down 23 percent to $5.78 a share.

The Chicago-based daily deals website reported weaker-than-expected second quarter revenues totaling $568 million, or 8 cents a share, compared to forecasts of $575 million. Sales increased 45 percent from the same quarter in 2011, but rose only 2 percent from the first quarter.

As of the quarter ending June 30, Groupon reported it had 38 million active users — a 65 percent year-over-year increase — and that North American revenue grew 66 percent year-over-year. Groupon cited Europe for its weaker growth, yet others wonder if daily deal fatigue has set in.

While the stock is down 70 percent from its $20 IPO price, the company is now profitable ­— the second quarter was the company's first-ever profit generating quarter. Net income totaled $28.4 million, or 4 cents a share, for the quarter compared to a more than $100 million loss in same quarter for 2011.

"We had a solid quarter despite challenges in Europe and continued investment in technology and infrastructure," said Andrew Mason, CEO of Groupon. "We've deepened our relationships with a growing base of merchants and customers worldwide, demonstrating progress as we work to unlock the opportunity in local commerce."

Yet gross billings, the amount Groupon collects from customers after paying merchants, decreased 5 percent from the first quarter. And the company warned revenue could fall further in the third quarter, setting expectations for sales between $580 and $620 million.

Ken Sena, managing director of equity research at Evercore Partners, says negative billings are most "worrisome" to him because it signals slowing consumer demand.

"You are still talking about a $4 billion dollar business that is barely profitable," says Sena in the accompanying video. "They really have to demonstrate for investors the whole promise around local, around satisfying demand and payments and inventory management."

The second issue of concern for Sena is the company's Groupon Goods business, which sells discounted items to customers and accounted for 11 percent of the company's second quarter revenue. Sena says this new division is a low-margin business and its revenue is calculated differently than Groupon's core business. Groupon Goods renders the company the "merchant of record" and books the total sale prices as revenue, whereas Groupon books revenues net of its payment to merchants in its core business.

Sena downgraded the stock from buy to hold in July over concerns that Groupon was not properly disclosing its Groupon Goods business in the first quarter. Groupon had cited technology improvements that led to better consumer targeting as the reason for its sharp increase in sequential North America revenue growth. Sena said he determined that much of the increase was really derived from the launch of Groupon Goods and the different accounting method.

He currently has a hold on the stock and after the earrings results lowered his price target from $9 to $6.50.