Local discounts marketplace Groupon (NASDAQ:GRPN) recently reported third-quarter numbers that were awful on all counts. Both revenues and profits missed expectations, with revenues falling nearly 15% year-over-year in constant-currency to miss even the lowest estimate on Wall Street. Billings dropped double-digits year-over-year. The customer base continued to shrink. What was a profit in the year-ago quarter swung to a loss this quarter.
All in all, Groupon’s third quarter earnings report was bad. But, in response to that bad print, GRPN stock didn’t drop. Instead, shares went nowhere. Heading into the print, GRPN stock was trading hands around $3. Today, shares dipped a couple cents below $3.
Why has Groupon stock flat-lined around $3 despite the ugly Q3 earnings report? Because that ugly print was already priced in, and $3 is exactly where the fundamentals say GRPN stock should trade today.
The investment implication? Stay on the sidelines for now. With shares trading in fair value range and with optical drivers sidelined for the moment, neither the bull nor the bear thesis look that compelling today. Instead, the most likely path forward for Groupon stock for now is for shares to trade sideways.
Groupon’s Fundamentals Are Decent
In the big picture, Groupon is supported by decent — but not good or great — fundamentals.
At its core, Groupon is a local discounts marketplace where consumers can find discounts on various products and services. If there’s one thing that consumers are always attracted to — regardless of the economic backdrop — it is low prices. As such, it makes sense that a local discounts marketplace would be supported by steady demand and have staying power.
At the same time, though, Groupon also has a ton of competition. They aren’t the only discounts marketplace in the game, and many vendors run discounts directly through their own channels so as to completely skip out the marketplace’s middleman. These headwinds have created a challenging operating environment for Groupon, wherein the platform is becoming increasingly less useful and relevant for consumers.
That’s why users, billings, and revenues at Groupon are all declining. But these declines won’t last forever, because Groupon’s value prop of connecting local businesses to local consumers through discounts has staying power and is unique.
As such, in the long run, users, billings, and revenues will stabilize. As they do, cost cutting should drive margin improvements and profit growth should come back into the picture.
Net net, while Groupon is far from a growth company, it has the characteristics necessary to support long-term stability.
Groupon Stock Is Fairly Valued Around $3
Given that Groupon projects as largely stable in the long run, Groupon stock is fairly valued today around $3.
Here are the numbers. Revenues will likely come in somewhere around $2.3 billion to $2.4 billion this year. That revenue base should be able to grow at a roughly 0% to 2% pace over the next few years, thanks to user base stabilization from in-app and on-web product improvements, more aggressive international expansion, and continued build-out of a catalog of buyable experiences and services.
Meanwhile, profit margins should inch higher as cost-cutting measures converge with renewed revenue growth to drive positive operating leverage.
This combination of slight revenue growth and mild margin expansion should produce around 30 cents in earnings per share by 2025. Based on a market-average 16-times forward earnings multiple, that equates to a 2024 price target for GRPN stock of $4.80. Discounted back by 10% per year, that equates to a 2019 price target of right around $3.
Bottom Line on GRPN Stock
Neither the bull nor the bear thesis look that good on GRPN stock at the present moment. The reality is that this is a stable company that is being priced for stability. That seems fair. As soon as it starts being priced for growth, the bear thesis will look pretty good. As soon as it starts being priced for continued declines, the bull thesis will look pretty good.
Until then, though, the best thing to do with GRPN stock is to simply observe from the sidelines.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.