Groupon Stock Is Cheap, But It’s Not Worth Buying Yet

Earlier this year, I shared my thoughts on the shares of online discounts marketplace Groupon (NASDAQ:GRPN). My thesis was pretty simple. Specifically, I believed that, over the long-term, Groupon has staying power in the commerce world as a go-to discounts marketplace for a loyal base of consumers, and that GRPN stock would rise meaningfully. But the company’s recent sluggish growth trends do not support the idea that Groupon has staying power, and until those sluggish growth trends turn around and do support that idea, GRPN stock won’t rebound.

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Given this situation, GRPN stock will keep falling for the foreseeable future. But it will eventually bottom and turn around.

When I wrote my previous column about GRPN, Groupon was a $3.50 stock. Today, GRPN stock trades hands around $2.45,  a 30% plunge in about six months. That’s a big drop. But, is it big enough to make Groupon stock worth buying today?

No. From a fundamental, long-term perspective, GRPN stock does look undervalued today. But GRPN is only undervalued if it can stabilize its user base, revenues, and margins over the next several years through improving the experience of its users and doubling down on local, experience-focused discounts.

Right now, the numbers and trends do not indicate that the company can accomplish those goals. Until that changes, investors will continue to assume the worst about Groupon stock, as they should.

So Groupon stock  will probably remain weak until its numbers turn around. I’m not sure when that will happen. Consequently, there’s simply too much uncertainty and risk to warrant buying GRPN stock at this point.

Groupon Can Make a Huge Comeback

Groupon has a decent shot to make a huge comeback over the next several years.

Two things which consumers are consistently attracted to – regardless of consumption habits or the state of the economy – are low prices and high convenience. Discounts result in low prices.

GRPN is an online discounts marketplace. Sure, there’s lots of competition in the online discounts sector. Large companies offer discounts through their own stores and websites. Thus, although everyone likes discounts, not everyone will use Groupon. Many people will go straight to retailers for discounts, and a lot will obtain their discounts from other  third parties besides GRPN.

But Groupon has a large enough user base (nearly 50 million active customers) and high enough brand awareness to remain a relevant player in the non-cyclical-growth online discounts world. Indeed, through growth initiatives like improving users’ experience and focusing on local discounts, Groupon has an opportunity to actually increase its relevance in the online discounts world over the next few years.

As a result, there is a realistic opportunity for GRPN to grow its sales, margins, and profits at a steady, albeit slow, rate over the next several years. My modeling suggests that – assuming 0%-1% customer growth, 1-2% revenue growth, and slight margin expansion – Groupon’s earnings per share could reach 30 cents by fiscal 2025. Based on a forward price-earnings multiple of 16, which is average for the markets, the 2024 price target for GRPN stock would be nearly $5, about  double today’s price tag.

Current Trends Don’t Support a Rebound

The glaring problem with the long-term bull thesis on GRPN stock is that current trends don’t support the thesis, and haven’t for a long time.

At the end of 2017, Groupon’s gross billings growth rate was -3.7%, excluding currency changes. In each of the six quarters since then, its gross billings have dropped by at least 6% year-over-year, including a  gross billings drop of 9.5% last quarter.

On the revenue front, Groupon just reported an 11.7% constant-currency drop last quarter. Meanwhile, on the customer front, Groupon’s customer base started shrinking in the second quarter of 2018, and its declines have accelerated every quarter since.

In other words, Groupon’s top-line growth trends are accelerating in the wrong direction.

Its margin trends have been on a similar trajectory. Throughout 2018, Groupon’s adjusted EBITDA margins were consistently, meaningfully expanding. That trend has reversed course in 2019. In Q1, the company’s adjusted EBITDA margins dropped nearly 0.3 percentage points YoY. In Q2, its adjusted EBITDA margin decline accelerated to nearly 0.4 percentage points.

Groupon’s top- and-bottom-line trends are accelerating in the wrong direction. That doesn’t give much credence to the long-term bull thesis.

Until these trends reverse course, investors will continue to assume the worst, and GRPN stock will remain weak.

The Bottom Line on GRPN Stock

In the long-term, I think GRPN stock can reach the $5 range. But that long-term bull thesis is based on the idea that Groupon can remain a popular discounts marketplace.

The company’s current growth trends do not support that idea. Until they do, investors won’t believe it, and until investors believe it, GRPN stock won’t rebound.

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


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