Groupon Inc (GRPN) Stock Gets Exposed for What It Is — a Paper Tiger

With its novelty wearing off, GRPN stock will need to justify its existence

Groupon Inc (NASDAQ:GRPN) could be the ultimate cautionary tale for extremely hyped initial public offerings. Check that — GRPN stock is the ultimate cautionary tale.

Groupon Inc (GRPN) Stock Gets Exposed for What It Is — a Paper Tiger
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Starting off at $20 per share, Groupon stock jumped to an intraday high of $31.14 during its maiden run. It eventually closed at $26.11. Two weeks after the IPO, GRPN finished the session at $26.19. Since then, Groupon stock never saw such a high valuation.

Even back then, the GRPN IPO was met with skepticism. First, there was the whole fiasco regarding its use of an “adjusted consolidated segment operating income” metric. Essentially, it was a ploy to understate GRPN’s marketing and subscriber acquisition costs. That issue stymied earlier attempts at a Groupon stock initial public offering.

Then there was the problem of technical performance. Only a small allocation — about 6% of outstanding shares — of GRPN stock was offered at the first go-around. It was so bad that, at the last minute, the company’s underwriters brought in an additional five million shares to boost the total offering to 35 million.

But because the float was so small, Wall Street expected a bigger initial pop. That just didn’t happen, which then caused people to look at the fundamentals. Six years ago, Groupon stock was a troubled proposition. Today, it’s still more of the same.

Effort doesn’t Pay for Groupon stock

We can talk about the corporate cultural change, and the emphasis on action per CEO Rich Williams. No matter what anyone says about GRPN stock, no one can accuse Mr. Williams of slacking. Within a few months of taking over the helm in late 2015, Williams “struck a deal for a $250 million investment from Atairos. The deal also involved Comcast Corporation (NASDAQ:CMCSA), which agreed to ‘work with Groupon to identify and implement potential strategic partnership opportunities.'”

If effort was a quantifiable metric, Groupon stock would be on everyone’s wish list. Unfortunately, business strategies have to work in order to be successful. That critical element is what’s missing. You’d be hard-pressed to find much positives in the company’s financials. Margins are deep in the red, revenue growth is comparatively middling\ and the balance sheet is less stable than before.

In other words, when contrarians talk about how “cheap” GRPN stock is, they’re really just looking at the price tag. Against every logical framework, Groupon stock is exceptionally overvalued. That might be weird to say for an investment that costs less than a Big Mac combo. Unfortunately, that’s just where we are with GRPN stock.

But I think the biggest challenge is the competition. The success of GRPN literally hinges on whether or not they can impact the e-commerce space. I understand that “daily deals” are starting to fade in popularity, and that something needs to be done. Is moving into e-commerce the best option?, Inc. (NASDAQ:AMZN) finds it laughable. So too will Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).

I don’t want to be a jerk. I cried when I watched Rudy. But damn, this is a little more tricky than playing Notre Dame football.

GRPN Offers No Solutions

InvestorPlace contributor Lawrence Meyers took a less compassionate approach when he wrote an article entitled, “I Don’t Care What You Think, Groupon Inc (GRPN) Stock Is Going to Zero”. To clear up any ambiguity, he further stated that “Groupon has no future and any rallies in GRPN stock should be shorted.” I’m going to assume that Mr. Meyers never cried watching Rudy.

However, he does have a point. As he states, “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.”

Meyers further explains that while GRPN may believe that digital coupons are an innovation, to the end-user, they’re just another clearance house. This solution is already being offered by both online and brick-and-mortar retailers. There’s just nothing new or interesting about it.

In a way, Groupon stock is like the Wall Street version of Untuckit. You’ve seen the ridiculous commercials — an angry-looking man walks down the mean streets of Soho, all the while explaining that he never found a shirt that looked good on him. I don’t think I’m alone in proposing a mirror or perusing a size chart as a cheaper alternative. If anything, a tailor would be the way to go.

And that’s precisely the issue with GRPN stock. It’s an investment for a perceived solution. But look a little deeper and you realize there wasn’t a problem to begin with. I can see the case for a speculative bet based on the “dumber trader” theory. But other than that, I’d just steer clear.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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