Few investments have contrarian pull quite like Groupon (NYSE:GRPN). Personally, I think it’s due to the brand’s social cache. In the early 2000s, most of my co-workers couldn’t stop talking about their weekend-warrior deals. Now, there isn’t much chatter, which is reflected in the poor performance of Groupon stock.
Nevertheless, this is the opportunity. In the few months following its initial public offering, GRPN stock traded well above $20. Today, it’s in legitimate danger of dropping into penny-stock territory. But the reality is that people love deals. Since Groupon is still a known, albeit less-relevant, commodity, it understandably attracts buyers.
That’s why the markets gave ample chances for Groupon stock to right its ship. Despite troubling fundamentals, the company’s shares had a strong showing in both 2017 and 2018. Forecasting the ebb and flow for this deal-maker has been difficult, as you can tell from my prior write-ups. Within the same year, Groupon could gyrate from jubilation to utter panic — and back again.
Currently, we find ourselves in yet another one of these volatile mood swings. A few weeks after its disastrous second-quarter earnings report, GRPN stock started its well-deserved tumble. Against both its top- and bottom-line consensus targets, the company badly missed. The disclosure confirmed my suspicions that the brand was shedding relevancy.
Q3 came along in early November and did nothing to dissuade the bears. While GRPN beat the consensus for earnings per share, it again failed to meet revenue targets. Groupon stock absorbed a huge loss following the earnings announcement from which it’s now just starting to recover.
History tells us that when GRPN stock is bleeding, it’s a perfect time to buy. But this time, investors should abandon this “logic”.
Groupon Stock Is All Fluff and No Fundamentals
My only real caveat in remaining bearish on GRPN stock is that it’s a contrarian magnet. Traders love this company for its all-or-nothing beta. But, fundamentally, Groupon is as flawed as ever.
Those on the opposite side of the fence may bring up management’s efforts to shift away from coupon-dependency. Earlier, Groupon partnered with Expedia (NASDAQ:EXPE), FanXchange, and Live Nation (NYSE:LYV) to explore alternative business opportunities. But, clearly, none of this has positively-affected GRPN stock. Year to date, shares are down almost 40%.
The key reason is growth — or lack thereof. I’m not just picking on a bad earnings report or two. Groupon stock cannot succeed unless it addresses a long-term deterioration in demand.
However, the picture is downright shocking. Revenue peaked back in Q4 2015. Since then, the company has produced negative year-over-year quarterly growth. Moreover, we’re now at nominal lows not seen since 2013.
Of course, we expected some of the demand drop due to Groupon leaving unprofitable markets, as well as hitting the brakes on other low-margin ventures. But management can’t use that as an excuse at this juncture.
Unfortunately, this crutch seems to be one of few bullish arguments justifying Groupon stock. Some folks have put a positive spin on the declining sales and shrinking consumer base, noting that gross profit per active customer is increasing. Additionally, management enjoys a relatively strong balance sheet, rich with cash, providing resources for a comeback.
I don’t like these arguments. First, advocating for GRPN on the basis of gross profit per customer is like comforting people who got laid off by telling them that at least they won’t have to deal with rush-hour traffic. Second, having cash isn’t a panacea — you must know what to do with it.
Judging from Groupon’s technical charts, management is swinging blindly.
Without the Numbers, GRPN Stock Is Rudderless
Now, I should note that I’m not against the strategy of “doing more with less.” Essentially, Apple (NASDAQ:AAPL) is adopting this strategy in light of peak smartphone. The company is going to focus on selling premium-margin flagship products, which is what consumers want anyway.
That works for Apple because their brand epitomizes trendy, consumer-electronics based fashion. On the other hand, Groupon is all about discounts. And to achieve those price slashes, the company relies upon the collective. This is why it’s called Groupon and not “Singlepon.”
Going back to Economics 101, GRPN stock is dependent upon consumer economies of scale. As far as I know, there’s no such thing as economies of individuality. Therefore, management must do everything it can to increase its consumer base, not casually watch it fade.
Obviously, the company is giving up on this strategy and is, instead, seeking other ventures. But, at that point, it’s a confused brand. Plus, whatever businesses they’re seeking to disrupt, other mission-specific organizations likely have more experience and clout.
That said, I’m cautious about Groupon stock and its nasty ability to hurt premature bears. If you love the beta, GRPN might work for you. For everybody else, please stay away.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.