EOT Trade Alert – February 9, 2012
February 9, 2012
Trade Alert:
Buy GRPN April 2012 $21 Puts at $3.20 or better
Company Background:
Groupon (GRPN) runs an e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Groupon offers deals in 140 different types of businesses, including health and beauty, food and drink, activities, events, services, and retail. The company sends daily emails to its subscribers, advising them of discounted offers. All offers are targeted by the consumer’s location and personal preferences. Potential buyers can also access deals directly through both the company website and an innovative mobile application.
Short-Term Catalyst:
Groupon is one of the more recent tech IPOs to hit the market and they’re already polarizing analysts.
One reason for this is Groupon’s amazing growth rate. The company just reported 2011 revenue of $560.5 million… which represents 194% year-over-year growth! That’s off the charts by any measure.
Here’s the problem…
Since GRPN is a growth company, they need to spend big bucks on marketing and sales to continue driving their amazing revenue growth.
And they’re certainly not afraid to spend. Just last quarter, Groupon’s marketing costs, as a percentage of revenue, were up around 31%. While still quite high, that’s down over 22% from the previous quarter. That can be a bad thing for a company still searching for huge growth.
In their latest earnings report, GRPN beat revenues for the year, but they had a larger than forecast loss. As a result, Groupon shares sold off.
I think GRPN shares continue lower from here…
If they cut spending too far to improve the bottom line, they may miss on revenue. And if they continue to spend at the expense of profitability, shareholders may give up on the company.
The bottom line… a positive earnings report will be the only thing to take GRPN shares higher from here. And that’s three months away.
Since we’re buying puts just two months out, we’ll be in and out of our trade before their next earnings report. And barring a positive development with the company, there should be no reason for investors to send GRPN shares higher from here.
Let’s buy put options now to profit from the continued slide in Groupon shares.
Trade Details:
| Underlying Stock Symbol: | GRPN |
| Current Bid-Ask Price: | $2.85 – $3.05 |
| Option “Buy Up To” Price: | $3.20 |
| Break-Even On Stock At Expiration: | $17.80 |
| Maximum Risk Per Contract: | $320 |
Exit Strategy:
GRPN is trading at $21.37 per share. Resistance levels will be at $23 and again at $26. Remember, we want this stock to move lower. Support levels will be at $18 and $15. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.
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Category: EOT Trade Alert
