Groupon Inc (GRPN) stock is soaring Friday, after the online deals site posted both top- and bottom-line results that easily topped expectations. Today’s 26% jump is a welcome reprieve for investors, who, even after these swift gains, still sit on 62% losses over the past year.
Unfortunately, outsized one-day gains don’t say much about Groupon’s investibility longer-term. After looking at the numbers, I’m still not convinced GRPN stock is a good value.
Last quarter, while better than expected, didn’t come close to answering some of the burning questions investors still have.
GRPN Q4: By the Numbers
Once touted as the fastest-growing company of all time, Groupon’s growth rate has come back down to earth in recent years. GRPN fourth quarter revenue came in at $917.2 million, up 3.8% year-over-year. Even that very modest growth rate was far higher than what most of Wall Street expected; consensus estimates called for $845.9 million.
GRPN earnings per share also impressed, with adjusted EPS clocking in at 4 cents, infinitely better than the 0 cents in earnings market-watchers were looking for.
The daily deals site is in the early stages of a turnaround, aimed at making Groupon an integral part of local commerce. The turnaround has also centered around narrowing the company’s focus as it tries to focus on its two major markets above all others: The U.S. and Canada.
Execs are trying to engineer a turnaround in the GRPN stock price, not only by focusing on its core markets but also by slashing jobs. The company has now pulled out of 17 countries, or nearly 40% of the 45 it once operated in. That’s fundamentally a good thing, as Groupon had become spread far too thin.
Legendary growth investor Peter Lynch coined a term for companies that spread themselves too thin too quickly, dubbing it “disworsification.” While I worried at one point that Alphabet (GOOG, GOOGL) was doing this by getting into projects like self-driving cars, fiberoptic cable, and wind farms, I realize now that just because Alphabet does these things doesn’t mean it’s forgetting about its core business: Search.
By setting its sights too big, Groupon allowed other competitors like LivingSocial to infiltrate its core markets. Even RetailMeNot (SALE) is a competitor of sorts, and I wouldn’t be surprised to see Facebook (FB) throw its hat in the local deals game. The social network has already trudged into Yelp‘s (YELP) online reviews game, so online local deals might indeed be a logical next step.
The trouble with GRPN is that it’s not Google. There’s no guarantee it’ll have the best platform for doing what it does forever, and even if it did, it’s by no means clear that that underlying market itself isn’t already mature. What if Groupon has already grown as large as the market will allow? Then GRPN has to look to other markets to expand, and then we’re back to where we started with the problems that arose in its previous expansion.
The fact that Groupon stock trades for 141 times forward earnings isn’t as instantly damning as it would be for some other stocks, particularly since GRPN earnings, as we can see, are extremely volatile. In other words, GRPN could make 10 cents per share in 2017 instead of 2 cents per share, instantly bringing its forward P/E to 28 instead of 141.
Unfortunately I just have no visibility on whether earnings will routinely impress in the years ahead, and given the company’s trajectory in recent years, it’s tough to have much confidence that things at Groupon have permanently changed.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
