Groupon’s (GRPN) third quarter was ugly in just about every way possible. There really was nothing that investors could find to get excited about with Groupon earnings.
However, with Groupon stock falling 30% in reaction, and down 90% since going public in 2011, investors might need to consider that at some point most companies have value.
Therefore, let’s see if there is a silver lining in Groupon earnings.
Groupon Earnings at a Glance
Groupon’s third-quarter revenue fell 5.7% year-over-year to $713.6 million, $19 million below what analysts expected. Its fourth-quarter revenue guidance of $840 million (midpoint) is about $100 million shy of analyst expectations, and the company’s CEO Eric Lefkofsky is stepping down.
GRPN’s new CEO is its current COO, Rich Williams, and he already unveiled his plan to get Groupon back on track.
Williams said that Groupon will make investments to acquire new customers, will streamline its international ops and will shift product assortment in its goods business to drive margins higher.
While this plan might sound nice, investors have heard this before and realize that bigger investments mean higher costs and changing product assortment means an increased risk of disgruntled customers. Given the fact that Groupon’s gross billings fell 2% for the first time ever, it is a delicate time for the company and investors aren’t buying Williams’s vision.
The Silver Lining in Groupon Stock
With all things considered, you might be surprised to hear that Groupon stock is a great buying opportunity behind this weakness, a clear contrarian play.
Groupon stock is now trading with a market capitalization of just $1.85 billion. The company has $963.5 million in cash and cash equivalents on its balance sheet. Therefore, GRPN is valued at less than $890 million minus cash.
Meanwhile, Groupon’s free cash flow over the last four quarters is $227.8 million. This means that Groupon trades at less than four times FCF right now minus cash. That is ridiculously cheap. As a result, Groupon is a long-term value investment opportunity, and at the very least, it is a very attractive merger and acquisition target.
While Groupon clearly has its problems, it also has two advantages: GRPN’s daily deals and travel businesses account for more than 40% of its revenue, and each have gross margins that are historically over 85%. This is attractive in an e-commerce industry that typically carries very low margins.
GRPN’s other business, Groupon Goods, has low margins but continues to grow, with revenue up 8% in this most recent quarter. Furthermore, Groupon is still the only company that has really figured out the local e-commerce market. It empowers local vendors to local consumers, selling everything from massages to photography to recreation. These are high-margin products where Groupon sells vouchers and collects a percentage of the sale.
With that said, GRPN is not growing at the rate that shareholders would like to see, but with over $700 million in third-quarter revenue and nearly $1.5 billion in gross billings, there is also a place in the market for Groupon.
So long as Williams does not get too aggressive and keeps spending in check, GRPN valuation and free cash flow make Groupon stock a good buying opportunity.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities, but my initiate a long position in GRPN within the next 72 hours.
