Groupon Stock Price Hit By 'Amazon Tax'

  • Groupon’s stock tanked 6.5% as new tax laws might hurt profitability.
  • The stock is not expensive at its current P/S multiple.
  • However, Groupon is a risky bet given the challenges it faces.

Groupon Stock Price Hit By Amazon Tax

Groupon’s (NASDAQ:GRPN) stock has already been languishing this year. After yesterday’s (2 April 2014) big correction of about 6.5% the stock price is now down to less than half of what it was at the beginning of the year. Though the stock’s current valuations make it a tempting bet, among other concerns, Groupon may have to incur higher tax outflows soon. Given that the company has not made net profits for the last 7 quarters, this definitely isn’t good news.

‘The Amazon Tax’

Groupon’s stock tanked in response to the news that a tax law which could be detrimental to its interests, dubbed the ‘Amazon Tax’ might be revived.

To explain, retailers with a physical presence in a state are required to collect and remit sales tax on the good its sells, irrespective of whether the sales are made online or offline (in stores). However, since a Supreme Court ruling in 1992, retailers who don’t have significant operations in a state are exempted from collecting sales tax.

The debate has been that the ruling creates a disparity between online and brick and mortar retailers. In March 2013, New York’s highest court ruled that Amazon (NASDAQ:AMZN) and other retailers based outside the state must collect sales tax from its New York State customers. Eight other states have followed suite since then.

However, in October last year The Illinois Supreme Court struck down a similar proposal, claiming that such a law was pre-empted by federal law. As expressed by Overstock’s (NASDAQ:OSTK) acting Chief Executive Jonathan Johnson, the ruling had different states saying different things. Now, Illinois legislators have tweaked the tax proposal such that sales tax can be imposed on retailers who issue promotional coupons in the state via mail, television or radio. What might partially save Groupon is that it has recently shifted focus from its 'push' or e-mail strategy to a 'pull' strategy.

After the previous scare, some online retailers shifted base to other states. However, there are some sections that gunning for a US vide implementation of such a law. So, relocating might not be a long term solution. Either way, both options, be it a higher tax outflow or relocation will have financial implications.

Groupon’s Profitability and Stock Valuation

Groupon’s net profits have not been confidence inspiring to say the least.

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Groupon Net Profit Margins







In its latest (Q1 2014) earnings release, the company did mention that it will look to shore up profits. However, the measures it has outlined, like raising the minimum order for free shipping, are likely to hurt revenue growth. Further, if the tax law is passed, it will get increasingly difficult for Groupon to achieve what it has set out to.
Since the stock’s Year-To-Date (YTD) peak of $12.08 a share, it has consistently rolled downhill. What’s more worrying from an investor’s point of view is that Groupon’s stock price has crashed by 20%+ after each of its last 2 earnings releases.

After yesterday’s debacle, the stock trades at $5.5 a share. Groupon’s stock is not expensive at a Price/Sales multiple of 1.3 (assuming profits are not important).  That said, in the light of the challenges it currently faces, we think it’s a risky bet. Our analysis of Groupon assigns it a rating of 2/5 at its current price.

To see Groupon’s latest stock price movement, click here (NASDAQ:GRPN)

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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