Groupon (NASDAQ:GRPN) has spent much of its history in penny-stock territory. Since falling below $5 per share in the middle of 2015, GRPN stock has rarely traded above that level, as its revenue growth has stagnated.
However, despite its numerous flaws, GRPN appears to have placed itself on the path to profit growth. That change, along with the depressed stock price, have made the valuation of Groupon stock low. Although the nature of Groupon’s business makes GRPN a risky play, profit growth could finally break it out of its range.
GRPN Stock Looks Attractive, But Risky
To be sure, one can see why the price of GRPN is so low. From a fundamental perspective, Groupon sells a commoditized product: product and service discounts. Its competitive moat consists of the “Groupon” brand. In theory, anyone can enter this business, and many have.
That point alone has pushed many away from GRPN stock. In his passionate case against GRPN stock, my colleague, Josh Enomoto, referred to this equity as a “contrarian magnet.” He makes a tough but fair case against GRPN. Aside from the company’s thin competitive moat to which I alluded, Enomoto cited the company’s declining revenue. He also mentioned its attempts to enter other businesses, which in his view makes Groupon a “confused brand.”
I see much truth in what he says. Due to these risks, I do not think GRPN stock is worth its $20-per- share IPO price today, nor was it at the time of its IPO in 2011.
However, this is 2019, and Groupon stock trades at around $3.50 per share. I think that changes the dynamic. Thanks to its depressed stock price and its earnings, GRPN trades at a forward price-earnings ratio of 14.7. Granted, that might not mean a lot if its profits drop going forward. However, Wall Street forecasts that Groupon’s earnings will increase by double-digit percentage levels in both 2020 and 2021.
The Case for a Speculative Trade
While these numbers build a contrarian case for Groupon, investors need to remember that GRPN stock remains speculative. I do not recommend that investors make GRPN stock a significant part of their retirement portfolios.
However, traders do not become rich from buying Amazon (NASDAQ:AMZN); they build their wealth by purchasing the next Amazon. I’m not suggesting that GRPN stock will reach Amazon’s $800-plus billion market cap. Still, Amazon’s rise indicates that investors should speculate to a certain extent.
Also, investors should keep Groupon’s weaknesses in perspective. For instance, the fact that Groupon is profitable indicates that GRPN stock will probably not tumble like the shares of Blue Apron (NYSE:APRN). Additionally, none of Groupon’s numerous competitors has matched its success. The one company that came close, Living Social, is now owned by Groupon.
GRPN also reminds me of an experience I had with a stock called Priceline. Many years ago, I bought Priceline for just over $3 per share. I later sold it in the $8 per-share-range, happy about my “huge profit.” Today, Priceline goes by the name Booking Holdings (NASDAQ:BKNG) and trades for about $1,650 per share.
I’m not promising that GRPN stock will reach the same levels in the next 10 or 15 years. Nor do I want to beat myself up for selling Priceline way too early. All I am doing is making an argument for buying speculative stocks, whether it’s GRPN stock or other penny stocks with potential.
GRPN stock could at least potentially be profitably traded. It reached as high as $5.65 per share in the last year and traded for over $8 per share in 2015. GRPN can be profitable for investors simply by returning to those levels. It can generate a much larger profit if it can break out of its ranges of the last few years.
Final Thoughts on GRPN Stock
Despite Groupon’s weak competitive position and the current lack of direction of GRPN stock, a case can be made for speculating on GRPN stock. GRPN has stagnated for years, and, in light of Groupon’s business model that others could easily copy, one can easily see why Groupon stock has gained little traction.
However, given Groupon’s rising profits and low valuation, conditions that can push GRPN higher have begun to appear. Furthermore, GRPN could deliver outsized returns in the long run, particularly if it can maintain double-digit profit growth and become more focused.
Indeed, if Groupon’s profits keep growing and its focus becomes clearer, GRPN stock could become the company’s best discount yet.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.