Groupon Stock Needs More Than a ‘Hail Mary’ Merger to Survive

Groupon (NASDAQ:GRPN) reports its third-quarter results on Nov. 4 after the markets close. When it last reported earnings at the end of July, it missed analyst estimates. That miss cut more than $1 off the value of Groupon stock.

Source: Ken Wolter /

Over the past four quarters, GRPN earnings have been mixed relative to the consensus estimate, beating the number on two occasions and lagging on the other two. 

In the second quarter, Groupon was expected to deliver 2 cents per share in profits. It came in 50% shy at 1 cent. For this quarter, the consensus estimate is for 3 cents of earnings and $525.4 million in revenue. 

If GRPN stock wants to get back to $3 it’s going to have to pull a rabbit out of its hat on earnings day. Can Groupon deliver?

Groupon Still Has Value

In late January, CNBC’s Jim Cramer defended the company and its stock stating, “I’ll be candid. I like Groupon and I have been wrong. I keep seeing real value here so I’m not going to desert it, but it has not been a good one.”

From the day of Cramer’s comments through Oct. 29, Groupon stock lost 24% of its value, despite a 25% rally from its 52-week low of $2.31 in mid-August. I’ve seen little mention from the stock pundit since then about the company that created the local daily deals space.

As far as analysts go, two rate it a “buy”, one’s got it at “overweight,” seven are recommending “hold,” and one’s got it at “sell.” The average 12-month target price is $3.84, providing little upside for the stock.  

So far, I haven’t given you much good news. Be patient. I will.

Recently, my InvestorPlace colleague Luke Lango suggested that GRPN stock can bounce back by focusing on experiences rather than products and going intensely local, thereby staying out of the crosshairs of Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT). 

In September, rumors surfaced that Groupon was looking to acquire Yelp (NYSE:YELP), the online provider of crowd-sourced local business reviews. 

People involved in the talks suggest a merger could generate as much as $200 million in synergies between the two companies with annual earnings before interest, taxes, depreciation and amortization between $900 million and $1 billion. 

The two companies’ combined enterprise value is $3.8 billion.

When Groupon CEO Rich Williams does his Q3 2019 conference call, investors will certainly want to hear more about its plans to add value by getting bigger.  

Groupon Stock Is a Dog With Fleas

Last December, I made a case for trading in and out of Groupon stock. 

Buy-and-hold investors, like me, have no business even considering a stock like Groupon. That said, if you’re the type who relishes a lot of risk in your investments, or should I say, speculation, trading in and out of GRPN stock isn’t the worst idea in the world,” I wrote Dec. 12.

My argument was based on the fact Groupon had a free cash flow yield at the time of anywhere between 8% and 13%, dependent on the company’s actual free cash flow in fiscal 2018. 

Today, it’s trailing 12-month free cash flow is $93.5 million and its free cash flow yield is 6.6%, below the 8% level value investors use to gauge a stock’s attractiveness. In the same quarter a year ago, Groupon had a TTM free cash flow of $145.2 million, which means the company’s TTM free cash flow in Q2 2019 has deteriorated by 36% over the past year, a sign the company’s losing its value proposition.

To go out and merge two dubious companies together and expect that one plus one equals three is pure poppycock.

“It always amazes me how some dubious stocks captivate the minds of regular investors, while other well-run businesses go begging for investor attention. I guess people will always love watching car wrecks; Groupon is one of those in no uncertain terms,” I wrote last December. 

Nothing that’s happened in the past year suggests that anything’s changed. Anything short of a Hail Mary when it releases its earnings Nov. 4 will change my opinion.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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