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Groupon Down on Likely Revival of IL Sales Tax

Zacks Equity Research

Shares of Groupon (GRPN) plummeted 6.46% ($0.38) to close at $5.50 on Jun 2, 2014 following the reported revival of an Illinois sales tax law.

Earlier, Illinois had imposed a tax on out-of-state Internet retailers, which was originally targeted at Amazon (AMZN).That is why it is often referred to as the “Amazon tax.”

However, the Illinois Supreme Court had struck down the tax in Oct. 2013, citing a federal law that barred the imposition of taxes on out-of-state retailers that had no physical presence in the concerned state.

This federal law was passed in 2011 and it drove away many Internet retailers from Illinois, thus leading to a decline in job opportunities in the state.

Following the dismissal of the law, Illinois legislators have modified the proposal in a manner that sales taxes can be imposed on out-of-state retailers that issue promotional coupons and other materials through mail, radio or television.

It is likely that this amended bill may adversely impact Chicago-based daily deals site Groupon, which started offering coupons in the state only last year.

Despite impressive revenue growth at the online coupon and deal site, the company’s shares have dropped a massive 54.0% in 2014 alone. The factor primarily responsible for the aforesaid phenomenon has been the lack of profitability.

Groupon’s policy of launching new products on a regular basis and the growing popularity of its mobile app continues to attract consumers. The company reported strong holiday season sales with billings up 30.0% from the year-ago period.

Groupon noted that more than 50% of the transactions (55.0% of North America) were carried out through mobile devices with its offering of more than $100.0 million in Groupon Credits attracting customers.

Groupon’s latest acquisition of TicketMonster will help it to strengthen its position in the mobile commerce market. At the same time, it will provide significant traction to Groupon in the Korean market, one of the fastest growing e-commerce markets in the world.

However, we believe that the market is becoming more competitive due to growing interest of technology stalwarts such as eBay (EBAY) and Amazon. Google (GOOGL), which had recently launched a coupon business called Zavers, has now decided to exit because of the lack of profitability. Moreover, a volatile macroeconomic environment and continued investments to expand its merchant base are expected to impact Groupon’s near-term results.

Currently, Groupon has a Zacks Rank #3 (Hold).

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