Does anyone else remember the hype that Groupon Inc (NASDAQ:GRPN) generated when it went public? GRPN stock went public in 2011 and the stock quickly spiked to $25. It then quickly fell to $3, rallied over a couple of years to $12 and has since slowly sunken into the west.
There’s an important lesson in investing here, as well as a trade or two to be had with GRPN.
First and foremost, the reason GRPN never went anywhere is because the company does not solve a problem. That is the main criterion as far as having a sustainable business. Find a widespread problem, solve it and become a category leader in the long-term fixing of that problem.
Groupon doesn’t solve a problem. It may help businesses clear out inventory by offering goods and services at massive discounts, but for consumers, it was just another clearance house. We’ve seen this same issue manifest before, and the problem has already been solved by all forms of online and brick-and-mortar clearance options.
Thus, for consumers, finding discounts is not difficult. Whether GRPN made those discounts even cheaper is something the market initially had to wait on. What we’ve since learned is that it either doesn’t matter, or GRPN can’t create a business that takes advantage of it.
GRPN Has Nothing to Offer
I mean, how long after GRPN launched did we see competitors like LivingSocial? That’s the second issue for any sustainable business — is it a defensible market? That’s why the sharks on ABC’s “Shark Tank” always ask if the inventor of some great product has a patent. Well, you can’t patent clearance pricing.
So then we look at the financials for Groupon stock and find that they are deteriorating rapidly. Revenue growth was nearly 25% in FY14, but then it suddenly cratered to 3% in FY15 and looks like it will be flat to down in FY16. Meanwhile, SG&A has been virtually unchanged, resulting in annual losses every single year. (FY15 showed a GAAP profit, but that’s only because of a tax credit.)
Net income from continuing operations went from a loss of $89 million in FY13 and improved to a loss of $18.5 million in FY14, but then fell again to an $89 million loss in FY15. TTM operating loss is $122.5 million.
We always look at operating cash flow and the past nine months show it at negative $170 million, with free cash flow at negative $220 million. That’s cash burn, folks. While Groupon stock does sit on $690 million in cash and $181 million in long-term investments, that cash burn is going to eat through the cash hoard quickly.
So then we ask if some company might come along and buy out GRPN stock. I don’t see why anyone would. What proprietary technology does it have? Is its data list of consumers worth anything? We’ve already learned that nobody will even touch Twitter Inc (NYSE:TWTR) despite its rather large user base.
I just don’t see any future here for GRPN stock and neither should you.
Trade GRPN Stock
That being said, what are the possible trades? At $3.50 per share, GRPN does have (at the moment) about $1.60 per share in cash. So the market values the company at $1.90 per share, or an outrageous one billion dollars. On the one hand, you could say, that’s a bit less than 1 times sales and not unreasonable. But again, it’s losing money and burning cash, so I’d say it’s still expensive.
GRPN stock is in a trading range of $3 to $6, so arguably you could go long here and look for a flip of $1 to $2 per share. Once you cash out, though, you might then go short and ride it back down. Alternatively, you go short as it rallies and average up. Regardless, though, these are aggressive trading strategies for speculators only.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.