Should You Buy Groupon Inc (GRPN) Stock? 3 Pros, 3 Cons

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After an unceremonious 80% decline in 2012, Groupon Inc (NASDAQ:GRPN) shares have leveled off. Since then, GRPN stock has developed a well-earned reputation as a survivor.

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Groupon has lived on even as most of its peers have been sold off or shut down. The company has never generated meaningful profits, but it has produced plenty of free cash flow to keep its coffers relatively full.

GRPN’s business model has pivoted on occasion, entering new niches, expanding internationally and then sharply pulling back. The company’s latest refocus, with a much higher marketing budget, appeared to pay some results in 2016. But momentum may be fading again. Can Groupon stock break out in 2017, or will it be another challenging year?

GRPN Stock Cons

Unlikely to Be Acquired Soon: Many investors held onto GRPN stock over the last year due to acquisition hopes. Groupon’s name often comes up in e-commerce M&A discussions.

Alibaba Group Holding Ltd (NYSE:BABA) seems like a logical suitor in particular. Alibaba owns more than 5% of GRPN. Acquiring Groupon outright would certainly give Alibaba a big opening into the U.S. market.

However, according to Streetinsider, Alibaba has no interest in acquiring the rest of GRPN stock. And if not them, who else? Groupon listed in the U.S. years ago; no domestic player has bought it yet. Amazon.com, Inc. (NASDAQ:AMZN) shut down its similar-to-Groupon service Amazon Local. LivingSocial limped along for years not finding success before Groupon finally bought it for an “immaterial amount”. There is little indication that there is much demand from actual buyers to grab a coupon site.

2016 Performance Relied on Heavier Discounting: Groupon seemed to put in better results for much of 2016. GRPN stock spiked last summer on seemingly strong results before gradually bleeding off for the rest of the year. Its Q2 2016 results in particular impressed, with revenues and EBITDA beating expectations by a sizable margin.

However, it appears the company achieved these results by offering consumers even more discounts. Discounts on top of discounts in fact, giving customers a sale offered by Groupon in addition to the reduced price the participating retailer or restaurant provides. This is bad for margins, of course, but it also damages the business in the long run. Site users become accustomed to getting ridiculously big discounts, and will lose interest if GRPN only offers the usual 40% to 50% discount.

Cash Position Less Than It Appears: One of the cursory reasons to like GRPN stock is the company’s seemingly large cash position. The company’s balance sheet states that it has almost $700 million in cash on its balance sheet. Against a market cap of $2 billion, a $700 million cash position seems like sizable support for GRPN stock.

But this cash position isn’t actually available to the company. Looking more closely at the company’s balance sheet, we see that nearly all this cash is spoken for. The company owes more than $600 million in accrued merchant and supplier payables. That is, the money that it needs to reimburse to the stores which have sold Groupon deals once they are redeemed.

While GRPN does benefit from holding cash due to merchants for awhile, this is far from that cash actually being a Groupon asset. Investors looking at that cash line and thinking it will support GRPN stock are making a mistake. The company has also started to take on debt recently, whittling away the company’s cash position further.

GRPN Stock Pros

Competition Diminishing: As mentioned above, Amazon shut down its Amazon Local service. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) shut down its Google Offers back in 2014. On top of that, Groupon recently bought out rival LivingSocial.

Add it all up, and, at least in the U.S. market, GRPN has far less competition to deal with. It’s not entirely clear whether online coupons are a sticky business: Groupon hasn’t fully proved that their business model is continuously profitable. However, if it is, GRPN has the field to itself, since the competitors have already given up on the niche.

Focusing on Better Markets: Groupon simply overextended itself. It expanded into dozens of more marginal markets scattered around the globe. It expanded to fairly small and far-flung locales such as Morocco, Panama and Uruguay. This might be logical if your business model is like Uber, where there are limited costs to scaling up in new markets.

However, Groupon has much heavier costs to enter new markets. One of its main challenges is finding new businesses in each locale that will want to offer discounts through GRPN. That requires pretty heavy spending on local employees to sell the Groupon concept to skeptical companies.

It’s not as simple as translating a phone app. When GRPN tried to spread itself to dozens of markets, facing different languages, currencies, consumer tendencies and regulatory conditions, it was simply too much. Groupon’s retrenchment to stronger markets, including its core North American business, may be the key that allows it to finally generate consistent profits.

Alibaba Involvement Is a Plus: Owners of GRPN stock hoped that Alibaba would buy the whole company. It seems pretty certain that this is not about to happen. However, Alibaba is still a first-rate partner, and it gives Groupon a good deal of credibility.

There appears to be a building arms race among Chinese and American e-commerce businesses. Consider Wal-Mart Stores Inc’s (NYSE:WMT) budding alliance with Alibaba’s arch-rival, the Chinese e-commerce firm JD.com Inc(ADR) (NASDAQ:JD).

Walmart originally inherited a small portion of JD’s stock in return for selling JD Walmart’s Chinese e-commerce business. WMT liked what it saw so much that it greatly increased its stake in JD later in 2016. Alibaba won’t want to get outflanked by those two, and may use its U.S. partners, such as GRPN, to stay ahead of the competition.

Bottom Line on Groupon Stock

GRPN stock may be ready to bounce back. The business isn’t performing that badly, and Groupon stock has taken quite a whack since last summer. The loss of near-term M&A possibilities is a blow, but the share price seems to fully reflect that already. That said, management hasn’t convinced many people that it can find a route to consistent profits.

GRPN is a survivor, but with a $2 billion valuation, the company needs to do more than just break-even to justify its valuation, even at just $3.50 a share.

At the time of this writing, Ian Bezek owned stock in JD and WMT. He held no position in GRPN stock. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/should-you-buy-groupon-inc-grpn-stock-3-pros-3-cons/.

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