GRPN: Q4 Report Tonight, And A Couple Ways to Play

by Dan February 8, 2012 3:01 pm • Commentary

GRPN ($24.25)

-report Q4 tonight after the close.

-options market is implying about a 14.5% move (with stock at $24.00 take the Feb10 weekly 24 straddle offered at 3.50 and divide by the stock price, that will give you your break-evens on Friday’s close).

-Wall Street analysts are obviously fairly mixed on the name with 7 Buys, 12 Holds and 4 Sells and Short Interest is through the roof at a little above 40% of the float.

-Stock is up 16% ytd, outpacing the Nasdaq which is up almost 12%, but most of these gains have come since Facebook’s filing of their S1 for their impending ipo.  Facebook’s valuation has helped sentiment in names like GRPN and ZNGA, but once the hangover passes, these companies will have to stand up on their own merits.

Citibank Analayts Mark Mahaney who has a Neutral and 12 month price target of $24 had the following to say in his quarterly preview note:

We are looking for $1.31B in Gross Billings, $479MM in Net Revenue, $31MM in CSOI, and $0.05 in Pro Forma EPS. Based on our model sensitivity work, intra-quarter datapoints, and channel checks, we view our Q4 estimates as reasonable. Changing FX trends (International = 66% of GRPN Gross Billings) will likely reduce potential upside to our estimates, but we don’t see evidence that they will cause material downside to our estimates.

Our GRPN fundamentals call for Q4 is Mixed – We are expecting Y/Y reported Gross Billings & Net Revenue growth to decelerate sequentially (from about 400%+ Y/Y growth reported in Q3:11 to roughly 200% Y/Y growth estimated in Q4) – still growing at an impressive rate. Our fundamentals call is also based on our estimate for a material CSOI margin expansion (from CSOI losses in Q4:10 and Q3:11 to 2.3%
margin estimated in Q4:11), primarily due to leverage thru SG&A and Marketing.

We believe material upside valuation from here (GRPN is currently @ 42X ’12 EBITDA) requires
success in new segments (Groupon Now, Groupon Rewards, Getaways, Live, Goods, etc…) that we believe could take significant time to prove out. And, at this time, we believe GRPN’s investment positives and risks are fairly balanced


MY VIEW: this is not the sort of stock that I would want to own, not because the valuation is ridiculous (trading at 12x trailing 12 month sales), but because I think there is a very distinct possibility that the hype surrounding the company will quickly turn to frustration annoyance by both consumers and vendors.  While these guys have a massive first mover advantage, I am not sure the barriers to entry by companies with established web presences is that high.  To be very fair I do not have any particular insight into their business, but I know that it is not the sort of thing that I would use and generally from what I have heard from users is that there is a strong possibility that their best deals are behind them.  As far as what I have read about some local vendors, it has the ability to blow your small business up, sometimes in a very good way but often in the exact wrong way.

I obviously have no clue  what the company will report or guide to, but it better be good given the stock’s recent run. Buying the move seems like an awful hard way to make money, and in some ways I could see the stock under-performing the move as any weakness may be met by buyers looking to play for a run into Facebook’s IPO bonanza expected in the spring.

I guess there are 2 trades that I would consider that worked over the last couple weeks in names Like NFLX and GMCR, both with high short interest (like GRPN)–  a call calendar. There could be 2 reasons to do this. One, you think there is a chance you get a spike higher following the print to about the implied move, at which point you could make the difference between the longer dated call that you own and the short dated one you are short. Or, it’s a play for a muted move following earnings but help finance the purchase of a call further out that may benefit from an internet frenzy into Facebook ipo….

The second trade is if you think the more than 200 million shares set to come unlocked on May 1st could serve as a significant overhang and you want to look to finance the purchase of April Puts.



TRADE 1: GRPN ($24.30) Feb17th / April 28 Call Spread for .80

-Sell Feb 28 call at .65

-Buy Apr 28 call for 1.45

Break-Even on Feb Exp:

Max risk is .80

If the stock is below 28 on Feb Expiration you effectively own the April 28 call for .80 and then can look to turn into a call spread to further reduce your risk, or if you get a big spike scalp the difference btwn the 2 options.


TRADE 2: GRPN ($24.30) Feb17th / April 20 Put Spread for 1.60

-Sell Feb  20 put at .60

-Buy Apr 20 put  for 2.20

Break-Even on Feb17th Exp:

Max risk is 1.60

If the stock is above 20.00 Feb 17th expiration you effectively own the April 20 Put for 1.60.

I chose the 20 strike because that is the IPO price where the stock should see some support, but may not be able to hold in front of the IPO lock up.