Due to its incredible volatility, Groupon (NASDAQ:GRPN) is a trader’s best friend. In 2017, GRPN stock surprised market observers by gaining over 48%. But how it got there was the real story. Shares flashed plenty of opportunities to trade on both the long and short side.
But this dynamic is also what makes GRPN stock a less than ideal platform for traditional or conservative investors.
In 2017, the high-low spread in the share price was well over 100%. If you got the move right, you’re obviously sitting pretty. Get it wrong, and you experience the opposite emotion.
Even if you’re a firm believer in the company and its rebranding and recovery efforts, the ride is not comfortable. For instance, prior to its second-quarter earnings report, GRPN stock had lost 8% year-to-date. The share price’s high-low spread since the beginning of January is nearly 37%. It appears a bottom has formed at around $4.20.
The question is, do you trust it to hold?
It’s an intriguing dilemma. Recently, InvestorPlace’s own Bret Kenwell featured GRPN stock in his five cheap stocks to buy list. He clearly defines the aforementioned support level, as well as a bullish pennant formation that’s “about to blow.” Essentially, the trading range has narrowed sharply over the last several months, indicating a temporary deadlock between bulls and bears.
This deadlock had formed right before the Q2 earnings report. According to the technical approach, we’ll see decisive moves for GRPN stock over the next few trades.
Contrarian enthusiasm for the company isn’t limited to the charts. Groupon also has partnered with Expedia (NASDAQ:EXPE), FanXchange, Live Nation (NYSE:LYV) and others to shift away from coupon-dependency. But will these efforts suffice?
Bad Q2 Miss for GRPN stock
For a company that has stated its intention on profitability over growth, Groupon’s Q2 earnings report was exactly what they didn’t need. A miss onconsensus earnings per share would’ve bad enough, but Groupon also fell short of downgraded revenue expectations.
Prior to the disclosure, analysts’ consensus EPS target was 3 cents. Actuals came in at a disappointing 2 cents. The EPS result was identical to what we saw in the year-ago quarter.
For revenue, the Street expected $632.46 million. The actuals came in at $617.4 million, or a 2.4% miss. This was truly disappointing because the lowest individual estimate anticipated $628 million — meaning GRPN missed even the lowest analyst expecation by an alarming 1.7%.
While investors have largely bought into the recovery thesis, a genuine concern exists that Groupon is losing relevancy. The markets will sometimes excuse bad misses for a good story. However, this earnings report lacks a convincing read.
One positive is that management reaffirmed its adjusted EBITDA guidance for the year. However, that’s part of the problem: we read positive implications, but without substantive evidence.
For instance, North American active customers totaled 32.2 million, while international added 17.1 million. All told, the 49.3 million customers is a 2% lift from the year-ago quarter, but a 0.6% sequential decline against 2018’s Q1 results.
GRPN Stock Is Technically Impressive, But Fundamentally Flawed
Despite the bad earnings miss, I admit that GRPN stock maintains an impressive ability to surprise. Yes, shares are extremely choppy and volatile. Day to day, you never know what you’re going to see. Roughly speaking, though, the markets have responded well to management’s re-branding efforts.
The other unignorable tailwind is the potential buyout. Groupon is looking for a suitor, and analysts have rumored that either Alibaba (NYSE:BABA) or IAC (NASDAQ:IAC) could step up. I don’t need to stress what that could do to Groupon’s market value. Just the rumors alone shot GRPN stock into double-digit territory.
I’ve witnessed Groupon gyrate every which way throughout the markets to doubt its profitability potential. At the same time, I have doubts about its recovery campaign, and so do the traders — hence the volatility.
To crystallize my reservations about GRPN stock, you’re buying mostly into potential and forward-looking assumptions. For instance, bullish analysts talk about Groupon being undervalued. That’s true, but only against forward earnings. Compared to trailing earnings, GRPN looks disastrously overvalued.
Subscriber growth is another headwind (Editor’s Note: Paywall). Yes, the company is growing its consumer base, but only against the prior year’s metric. Since hitting a peak of nearly 54 million active customers in Q4 2014, growth has gone negative.
Anybody with intellectual honesty can look at the sub-growth chart and recognize that Groupon has hit a plateau. They’re making progress but not enough to justify a heavy-handed position.
Which brings us to the question, should you buy GRPN stock here? No, but I understand why you’d want to. I must stress, however, to keep a vigilant eye on it if you’re going to pull the trigger.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.