Groupon shares: Suddenly cheaper, but a good buy?

Groupon shares fell 27 percent in trading Tuesday after the company reported its first decline in gross billings. Groupon shares are now down 72 percent from their IPO price last November. 

Groupon's stock is 27 percent cheaper Tuesday, but that doesn't make it a bargain.

Its stock fell as analysts slashed targets and ratings on the online deals company after it reported its first-ever quarter-to-quarter decline in gross billings, a measure of how much money Groupon collects from customers.

Groupon blamed the weak economy in Europe and unfavorable currency-exchange rates.

But analysts pointed to a more troubling possibility: online deals fatigue.

Groupon Inc. pioneered the online daily deals market, which offers subscribers deep discounts on everything from spa sessions to tequila tastings. Although it has raced to build market share, similar businesses are easy to set up. The model sparked a flood of copycats, including LivingSocial, Google Offers, Travelzoo, DealOn and SocialBuy. Together, deals flood online mailboxes multiple times a day.

"It appears the daily deal business has run into a wall," wrote Clayton Moran, an analyst with Benchmark Capital, in a research note. "From what we can tell, the bears were right."

Moran slashed his price target on the shares from $20 to $7 and downgraded his rating to "Hold" from "Buy."

The stock fell $2.04, or 27 percent, to close at $5.51 Tuesday. That's 72 percent below its initial public offering price of $20 in November. Groupon had no immediate comment Tuesday.

Many analysts pointed to several troubling signs from Groupon's second-quarter earnings report, which was released Monday after the market closed:

— Gross billings fell to $1.29 billion in the quarter through June, down from $1.35 billion in the first three months of the year. Although that was still a 47 percent increase from a year ago, excluding foreign exchange movements, the figure had more than doubled in the previous quarter and nearly tripled in the quarter before that.

— The company forecast adjusted earnings — what it calls consolidated segment operating income — at $45 million to $65 million in the current quarter. That profit figure, which excludes stock compensation costs, was far below the $80 million expected by analysts polled by FactSet. It was also a decline from the $72 million it reported in the second quarter. A likely factor was lower profits from its direct sales of goods.

— Active customers grew only 3 percent to 38 million compared with the first quarter, while spending per customer over the previous 12 months fell to $165. That compared with $179 in the first quarter, $187 in the fourth quarter of 2011 and $189 in the third quarter of 2011.

Groupon largely blamed Europe.

Groupon gets more than half of its revenue from outside of North America, and most of that comes from Europe, where economic worries are affecting sales. CEO Andrew Mason told analysts Monday that deals for discretionary items such as laser hair removal and luxury hotel stays were suffering.

A weaker euro and British pound also translated into fewer U.S. dollars in the quarter.

The Chicago-based company said it was aiming to solve some of its problems in Europe by investing to update its technology, changing its mix of promotions to lower-priced services and stepping up its own advertising to increase brand awareness.

Those investments were also questioned.

Mark Mahaney, an analyst with Citi Research, cut his price target on shares to $9 from $19, and downgraded them to "Neutral" from "Buy."

"The (return on investment) and timing of necessary platform investments won't be known for some time," he wrote in a research note Tuesday. "And this management team doesn't yet have an execution track record. And in the meantime, the core Daily Deals business is sharply slowing."