Is Groupon a Value Buy or a Red Flag?

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Those who love irony will love the state of Groupon stock: available for 50% off compared to their 52-week range, the e-discount company has seen their value positively tank in the past year.  The reason for Groupon's massive decline isn't a disinterest in online spending, which continues to grow at near-exponential rates.  Nor is it a matter of customers choosing to go for full-price value, as marketing analysis firms like Schaefer's have released pre-emptive holiday spending reports that indicate that buyers are willing to jump through hoops in order to get their hands on quality goods at discount price tags.  As such, the current spending environment should represent a bull market for Groupon.  Instead, the original online discounter looks like they're going to struggle just to keep their heads above water.  What's caused their slow-but-steady decline since the 2010 peak?

Initial Public O-vation

When Groupon stock (GRPN on the NASDAQ, trading for $4.29 a share) first became available for public trading, the market reaction could hardly have looked better.  Groupon surged out of the gates, rising to its historic high of just under $30 per share just two months after the company launched their IPO.  No other company had the foresight and the aggressive networking needed to pull off the business model of Groupon, which has the unique benefits of not actually selling anything of their own (no supply chain needed!) and not worrying about sunken costs (they make money whether the customer uses the Groupon or not).  In theory, you can hardly find a better business model, and for about half a year the stock fluctuated rather wildly but remained in a consistent, healthy range between about $15 and $25 a share.  By the end of 2012, however, investors had positively jumped ship on Groupon, sending the offering price down to below $3 per share.  A slow and small peak saw Groupon reach double-digits again by 2014, only to see them collapse in a second crash to today's pittance of an asking price.  The picture today seems so bad to investors that no less than 15% of all their shares in circulation are trading on short-interest, suggesting that a disastrous one in seven investors think that Groupon's value will drop in both the short and the long term. 

Numbers Games

It's far from unusual for companies to struggle in their first few years off the penny sheets and running with the big boys.  Groupon's growing pains, however, suggest that they're not just hitting one or two roadblocks but just about all of them.  Their revenue through 2015 has grown by only about 3%, meaning that the company is just barely beating out the interest rate and doing little better than a certificate of deposit as an engine of growth.  Groupon has taken a beating thanks to the downfall of global currencies since they depend so exclusively on the various rates of exchange; the decline and fall of the Euro, yuan, Australian and Canadian dollars, and more have turned into an extreme drag on their profitability.  Indeed, their sales excluding currency fluctuations sit at a far more impressive 11%.  While Groupon is looking decent in North America and emerging markets, with sales standing at nine and ten percent growth respectively, sales throughout the rest of the world dropped by three percent overall, giving the company net growth of just seven percent, nowhere near enough to make investors optimistic about their prospects.  While their number of repeat customers is growing at a lukewarm six percent clip year-over-year, the repeat customer spending has dropped by about two percent, from $136 per year to $133. 

Adaptation Adoption

With the problems facing Groupon, how does their management intend to right the ship?  Not by tweaking the business plan, but with some rather large changes.  While we think of Groupon as a large daily-deal seller, the company has decided that it's time for this old dog to learn some new tricks.  Groupon wants to drastically change their dynamic from a company offering a variety of products to one that targets customers on an individual and local basis.  They've adopted search algorithms and data-mining in order to track customer spending habits (both on their site and on metric-sharing e-sales providers) and pre-emptively create a product that you'll want to buy.  Their brass refers to this as a push rather than a pull: customers will go to Groupon in search of deals for things they know they'll like, rather than getting spam email luring them to the main site for a singular purpose.  This is similar to Amazon's Black Friday deals, which use a search algorithm that highlights deals based on spending habits -- college kids, for instance, won't see deals about deluxe diapers or silverware sets.  Groupon also has put plans into motion to emphasize repeat spending by focusing more on restaurants, entertainment, and health and beauty to turn the site into a place where customers visit daily rather than relying on infrequent business. Their management acquired OrderUp, a food delivery app, with the belief that they'll be one of the first major companies to carve out a market segment of this rapidly-expanding $70 billion business.  That's reason for optimism, depending on your investing stance.

  • The Takeaway: there's a lot of risk and a lot of reward in Groupon stock: the .8 beta really says it all.  A portfolio that needs steady, predictable gains should look elsewhere, but those interested in volatile stocks with lots of potential for growth should buy Groupon while their stock trades at near-historic lows.  While the financial stats of the company could be more impressive, they have a very large customer base that includes the coveted millennial market as well as adults under 40 and high earners.  Groupon may be underperforming, but they aren't going away.
  • With a one-year target of just $6.75, the success of even one of their business shifts could leave Groupon outperforming the market predictions.  As the company shifts its focus to compete in new ways, it's unlikely that they'll fail to reach this rather puny threshold.

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