Why Groupon’s Shares Fell 20 Percent, Even Though Profits Are Up

Groupon exceeded earnings expectations for the second quarter and revenues were in the right ballpark.

So, why did the company’s stock fall a jaw-dropping 20 percent?

In a nutshell: During the quarter, most of the company’s growth came from its lower-margin products business and not its super-lucrative coupons business.

Groupon Goods, which sells everything from bed linens to yogurt-making kits, surpassed $200 million in annualized revenue in the quarter.

While that’s impressive for the nine-month-old business, investors and analysts have a good reason to be bummed. Sales from Groupon Goods, along with other items the company sells directly, accounted for 12 percent of revenue during the period. When excluding these items, revenue actually fell 7 percent compared to the first quarter.

Additionally, since Groupon purchases some of these items in advance, its expenses went up. In the second quarter, Groupon’s so-called “cost of goods sold” increased to 24 percent of sales, up from 14 percent in the year-ago period, explains The Wall Street Journal.

In a detailed analysis of this trend, Business Insider’s Henry Blodget said: “Groupon’s core business … is now shrinking.”

The chart on the left illustrates this well.

In the second quarter, you can see how the company’s revenue is no longer increasing by leaps and bounds. Additionally, the company blamed some of the period’s difficulties on economic woes in Europe and foreign exchange rates. For example, Groupon said revenue increased 45 percent year over year, but would have jumped by 53 percent if the impact of foreign exchange was eliminated.

But it’s the core business that most investors find themselves concerned with. Going forward, the company is offering a conservative forecast. In the third quarter, it expects revenue to total $580 million to $620 million. Meanwhile, analysts are expecting revenue of $605.5 million, or slightly above the midpoint.

During the conference call, executives declined to discuss margins for Goods, which is really at the heart of the matter.

“The success we’ve had on Groupon Goods is a reflection of our consumer brand,” said Groupon’s Chief Andrew Mason, who added that the opportunity reminded him of the company’s early days. “Our customers think of us as a way to find unbeatable prices.”

In after-hours trading, the company’s stock fell nearly 20 percent to $6.06 a share to hit a new all-time low.