Sell Groupon Now Before It’s Too Late

Advertisement

At the beginning of August, Groupon’s (GRPN) stock dropped nearly 18% within a week. This decline was driven by its Q2 2014 announcement that Groupon had a wider loss than anticipated, has executed a new $250 million credit facility and lowered its guidance for the year. Since then Groupon’s stock has rebounded and is now trading at back to its pre-Q2 2014 announcement levels.

But that doesn’t mean you should dip a toe into GRPN stock. Far from it — Groupon is still a screaming sell.

GRPN: Time To Change

Revenues increased 24% for the quarter, but Groupon’s loss widened due to higher cost of marketing and new product line development. Groupon CEO Eric Lefkofsky took over in June 2013 and has been working to reduce Groupon’s dependence on its daily-deal emails by diversifying its offerings into physical goods with Groupon Goods, discounts that are offered through mobile phones and the launch of Gnome, a tablet-based point-of-sale system. Groupon also bought Korean ticket vendor Ticket Monster for $260 million this year, another step away from daily deals.

Groupon is clearly looking to transform itself, and with $868.1 million in cash and a negative cash burn for the second quarter of only $53.8 million, it has time to look for new investments and see what pays off. But expect some failures with any transformation. The key will be Groupon’s ability to diversify its investments to let stars shine and quickly kill the dogs of the portfolio.

A concern with almost any other business that Groupon gets into is margin. Groupon’s daily deals business leverages the current infrastructure of a locality to provide the goods or service. This setup allows Groupon to act as a marketer to accelerate the sales, but not actually hold any inventory or invest in fixed assets. With the venture into e-commerce and point-of-sale systems, margins may be crimped over the long term.

With Groupon’s Goods unit now making up over 38% of company revenues, its significance as to Groupon’s long-term strategy is becoming more prominent … and i’m not sure how Groupon hopes to compete with e-commerce giants like Amazon (AMZN) and eBay (EBAY) while still leveraging its local marketing expertise and feel.

Avoid Groupon Stock Due to Potential Management Issues

Groupon Logo

Last year, then-CEO Andrew Mason was pushed out of the company by the Board and has reportedly sold all of his holdings. Current CEO and co-founder Eric Lefkofsky still has substantial holdings, but he also has a mixed past. Groupon also went through an accounting scandal only months after it went public in 2011 and after both Mason and Lefkofsky took a huge payday in 2010 when Groupon had raised $946 million in a private offering, of which $136 million actually made it to the company. Lefkofsky was the biggest cash beneficiary of the private offering, receiving $381 million.

I wonder what Lefkofsky knew at time of the private offering and IPO, but that’s really not the point. Lefkofsky is in charge now, and if history is doomed to repeat itself I think investors should stay cautious and stay out of Groupon. Not because it is looks to be a bad company or that its transformation will fail, but because I always bet on management — and current management has too much risk for my tastes.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Email him at kfick@piercethefog.com or follow him at www.piercethefog.com.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/sell-groupon-stock-grpn/.

©2024 InvestorPlace Media, LLC