For long-suffering Groupon Inc (NASDAQ:GRPN) supporters, 2016 must have felt like a watershed moment as Groupon stock managed to deliver an annual total return of 8.1%, its first positive full-year return since going public in November 2011.
Groupon stock could have done much better in 2016, if not for a 19% slide in October, thanks to revised guidance for its final quarter of the year (guidance that really wasn’t all that bad, actually).
But, for those who would rather forget, GRPN stock came out of the gates flying, closing up 30% from its $20 IPO price on its first day of trading. It’s been downhill ever since, so 2016 was a welcome rally, despite October’s setback.
How Bad Has it Been for GRPN?
GRPN has a five-year annualized total return of -28.5%, almost 43 percentage points worse on an annual basis than the S&P 500. Adding insult to injury, Sears Holdings Corp (NASDAQ:SHLD), by comparison, had a relatively decent performance over the same period, generating an annual total return of -5.4%.
You must really suck as a stock to be beaten by Sears, the once-iconic department store that continues to wither right before our very eyes.
Recently, InvestorPlace contributor Josh Enomoto suggested that Groupon stock is a good bet for speculative investors who can stomach the volatility and risk. This perpetually money-losing business trades in an ebb-and-flow pattern that’s currently trending lower, but could rebound tremendously on good news … of any description.
He’s not wrong, either. Let me explain why.
On a GAAP basis, Groupon’s continuing operations (after tax) have lost $545.5 million over the past five fiscal years. However, the lion’s share of the losses was in 2011, the year GRPN stock went public. Everything about the company’s business model got ramped up that year: revenue, marketing costs, SG&A costs, etc. A year later, marketing costs came down to Inc of revenue from 47.7% in 2011.
Since then, marketing expenses have floated between $200 million and $300 million per year, while SG&A expenses have stuck around $1.2 billion. As a result, on a non-GAAP adjusted EBITDA basis, Groupon has actually made money, generating free cash flow of $208.1 million, $168.9 million and $155.0 million in each of the last three fiscal years.
Groupon Reports Q4 Earnings on Feb. 9
In its Q3 2016 earnings report, management estimated adjusted EBITDA for fiscal 2016 would be $150 million-$165 million. That means Groupon’s fourth-quarter adjusted EBITDA will be $52.6 million-$67.6 million which, at the high end, is about the same as Q4 2015.
Based on the average of the last three years, Groupon has turned 67.7% of its adjusted EBITDA into free cash flow. If management does the same in fiscal 2016, it will generate at least $101.6 million in free cash flow. Although that’s down from 2015, it’s still positive.
So, based on this estimate, Groupon’s current free cash flow yield is 4.9%, but could be twice that if its adjusted EBITDA returned to levels above $200 million, where they’ve been for the last three years.
This is where the rubber meets the road, as there is a real possibility Groupon will do just that.
As such, GRPN stock remains attractively valued to speculators who are looking to benefit from a bounce in its share price thanks to good news down the road.
Further, if you examine Groupon’s three-year chart, you will see that, despite the company’s problems making money on a GAAP basis, GRPN stock hasn’t traded below $2.15 over this period. This has provided investors with a floor price of sorts, and a little assurance that things likely won’t get much worse, but could get a whole lot better having traded just under $6 in August.
Add to this the fact that Groupon has a sound balance sheet with $514 million in net cash at the end of the third quarter and it’s easy to see why some investors would take a shine to Groupon stock.
However, if you’re a buy-and-hold investor, GRPN stock is the last place you want to put your money.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
