The past two trading days have been … well, horrifying for Groupon Inc (GRPN) shareholders, who have watched GRPN stock tumble more than 20% following disappointing first-quarter numbers and subsequent downgrades of the stock.
A massive overhaul effort from new CEO Rich Williams — and the correspondingly massive bills incurred by that effort — haven’t borne nearly enough fruit to satisfy investors, leaving them to wonder if the deals site is following in the footsteps of microblogging outfit Twitter Inc (TWTR). Sadly, it probably is Twitter all over again, burning cash supporting a platform that started to become irrelevant shortly after it was unveiled in 2008.
There are still plenty of GRPN fans and followers who will be quick to point out the company is still making forward progress. It’s unlikely, however, the majority of professionals as well as amateurs are wrong about the company’s plausible future.
Groupon Earnings, Outlook Recap
As a reminder, in its first quarter of 2016, daily deals company Groupon lost eight cents per share on revenue of $732 million. On a non-GAAP, operating basis, the loss came to only $4.6 million, or one cent per share. The total loss rolled in at $49.1 million.
The pros were calling for a top line of $708 million, but were also calling for a loss of three cents per share of Groupon stock. Revenue fell on a year-over-year basis though, from $750.3 million. The net loss roughly tripled from Q1-2015’s bottom line.
The market’s response to the Q1 numbers alone could have gone either way. Once Groupon announced its full-year projections though, traders readily saw the glass as half-empty. The company now expects its 2016 top line to roll in somewhere between $2.75 billion and $3.05 billion, straddling analyst expectations for $3.01 billion, and down from $3.12 billion last year.
The company also announced it would allocate $200 million of the recent $250 million investment from Atairos toward a repurchase program of GRPN stock.
While such a use of the funds will up the per-share value of GRPN, more than a few investors feel that money could be better spent investing in the organization’s growth rather than shrinking the float.
It’s Official — RBC Hates Groupon Stock
Having a weekend to think about it, analysts at RBC Capital Markets agreed with the market’s assessment … the glass is half empty. RBC downgraded GRPN from a “sector perform” to an “underperform” on Monday morning, lowering the firm’s target price on Groupon stock from $4 to $3.
The analyst note explained:
“While there were a few positive/neutral data points (North America Active Customer growth) in the March quarter print, we see very few signs of a turnaround in fundamentals at Groupon.”
Analyst Mark Mahaney was particularly concerned about the deceleration in North America’s revenue growth and local billings, saying of both, “…we believe they will continue to do so for the foreseeable future.”
It’s not a biased, scathing indictment. It’s just a simple observation of the fact that after six months on the job, ballyhooed Rich Williams has done little to improve the weakness that ultimately caused his predecessor to be removed from that post.
And yet, the RBC downgrade that’s responsible for Monday’s setback isn’t dramatically different than the consensus opinion. The average opinion is a hold, and sinking, while the average price target is right at $4, and also sinking.
RBC is simply on the leading edge of the trend currently underway.
Bottom Line for GRPN Stock
They’re tough words for some die-hard fans and owners of Groupon to hear, but they need to be said all the same — Groupon doesn’t bring anything earth-shattering to the table for consumers, and as such, is struggling to grow.
That’s not to say it’s not growing, and can’t grow in the future. The site brought nearly a million new North American users into the fold last quarter.
Those one million new users cost the company $39 million though. The math doesn’t make sense.
Never even mind the attrition that will surely materialize without the company remaining painfully competitive in terms of price and marketing… competition with much better-established players like Amazon.com, Inc. (AMZN) and Overstock.com, Inc. (OSTK), as well as a plethora of other venues that offer live event ticket sales.
The only unique proposition Groupon offers is localized deals, which has proven to be the toughest sale.
There is a niche for Groupon. It’s just not a business model to justify the current market valuation yet.
RBC isn’t apt to have dished out the last downgrade we see in while.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.