What Groupon, Inc.'s (NASDAQ:GRPN) 39% Share Price Gain Is Not Telling You

Those holding Groupon, Inc. (NASDAQ:GRPN) shares would be relieved that the share price has rebounded 39% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, there still wouldn't be many who think Groupon's price-to-sales (or "P/S") ratio of 0.9x is worth a mention when it essentially matches the median P/S in the United States' Multiline Retail industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Groupon

How Groupon Has Been Performing

Groupon hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Groupon's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Groupon's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.8% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 54% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 1.8% during the coming year according to the three analysts following the company. Meanwhile, the broader industry is forecast to expand by 12%, which paints a poor picture.

With this information, we find it concerning that Groupon is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

Groupon's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It appears that Groupon currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Groupon (1 doesn't sit too well with us!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Groupon, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.