On paper, Groupon (NASDAQ:GRPN) stock still can rally. Trading at a little over ten times analysts’ average 2019 earnings per share estimate, Groupon stock is cheap. And with its management talking up new initiatives, there’s at least some hope that its operations can improve enough to expand that multiple and increase the GRPN stock price.
There’s one core problem with that view, however; it’s existed for years now. Groupon has been trying to turn itself around since before its current chief executive officer, Rich Williams, took over back in November 2015.
Optimism towards GRPN and the results of its turnaround have increased and decreased ever since. Right now, however, the news looks grim, as the company’s earnings continue to disappoint investors, and Groupon stock touched an all-time low in August. After a 9% decline in early trading on Tuesday following a downgrade by Goldman Sachs, Groupon stock is near those levels again.
Under Williams, its current CEO, Groupon simply hasn’t been able to drive consistent growth — and Groupon stock now is priced accordingly. But that problem can’t necessarily be laid at Williams’ feet alone, and that might be the biggest obstacle facing GRPN at the moment.
The Problem With Turnarounds
Turnarounds can be fertile ground for investors. Chipotle Mexican Grill (NYSE:CMG) has been one of the best stocks of the past two years as the company has recovered its reputation after an e. coli outbreak. General Electric (NYSE:GE) likely is the most widely-covered turnaround play at the moment and has shown signs of life of late under its new CEO, Larry Culp. Bulls hope that Rite Aid (NYSE:RAD) can salvage value under its own new boss.
The issue is that, as a result of investors’ appetite for turnarounds, seemingly every struggling company wants to pitch itself as a turnaround play.
Executives of such companies will cite the “pillars” of a go-forward strategy or key “initiatives” that supposedly will change their performances. But not every company has a real turnaround opportunity. Sometimes their operating models are challenged, and industry conditions can change dramatically and permanently. (Brick-and-mortar retail is the most obvious current example of the latter phenomenon.)
Chipotle had a huge opportunity to change customers’ perceptions. GE had become an awkward conglomerate whose sum seemed to be worth less than its parts. Rite Aid has a debt load that has hindered its stock and could continue to do so.
Groupon, on the other hand, mostly “is what it is” — and that alone undercuts its turnaround hopes and the outlook of Groupon stock.
The Plan to Rescue GRPN Stock
Groupon’s current turnaround doesn’t seem like much of a turnaround. Williams has detailed four “strategic priorities” for 2019:
- Improve customers’ experience.
- Develop an open platform.
- Invest in the international business.
- Continue “operational rigor”
At least two of these efforts (the first and the last) shouldn’t be “strategic priorities” for 2019. They’re “strategic priorities” for any business at any time.
Detailed commentary in the company’s third-quarter shareholder letter hardly suggests these efforts are transformative. Groupon is improving its mobile experience. That’s a plus, but it’s also a necessity in the modern economy. Groupon Select, a new membership program, has picked up 260,000 subscribers. But there’s little doubt that many of those subscribers are on trial plans, and GRPN is discounting its offers heavily for those users. The jury remains out on Select.
The “open platform” effort is intriguing. Groupon is looking to move its catalog onto other sites and apps. But the partnerships listed in the Q3 letter — which are predominantly with small, private companies that won’t move the needle — suggest the initiative has not progressed much.
On the international front, Williams chalked up the company’s Q3 weakness to “Brexit” and macro factors. But Groupon never has really succeeded outside the U.S. That still seems to be the case: Goldman cited overseas declines as part of its justification for its downgrade to a “sell” rating
Operational rigor is a good thing, but as Williams himself noted after Q3, Groupon already has cut more than $250 million of selling, general, and administrative expenses in the last four years. There’s little left to cut. As I argued earlier this year, Groupon doesn’t have a “tech” operating model. Rather, it’s a labor-intensive model, owing largely to the enormous sales force required to add merchants.
What Can Drive Groupon Stock Higher?
And so the Groupon turnaround doesn’t look like that of Chipotle, which has succeeded, or that of GE, which might be revitalized. GRPN’s strategy boils down to “we’re going to keep doing what we’ve been doing — but we’ll do it better.”
That very rarely works. (Again, brick-and-mortar retail is an instructive example.) It certainly hasn’t worked for Groupon in 2019. Its Q4 earnings in February were somewhere between disappointing and disastrous. Its Q1 numbers were better, but its Q2 report sent Groupon stock to the aforementioned all-time low. The Q3 release was soft relative to expectations, and even Williams admitted that its gross profit and user numbers were weak.
A rumored tie-up with Yelp (NYSE:YELP) appears unlikely at this point. Groupon can’t really cut costs further. Its local operating model seems challenged, and its revenue from goods have declined. The GRPN stock price might seem cheap at $2.39, but it still is a company with a market capitalization of $1.5 billion and an enterprise value over $1 billion.
The company’s results and strategy barely support those valuations, if they do at all. And it’s hard to see how Groupon’s performance and outlook can really change. That’s not necessarily a knock on Williams; rather, the company’s operating model just doesn’t seem capable of driving real growth at this point. Groupon has tried to generate growth for most of this decade, and it hasn’t been able to do so under any of its CEOs or any of their various strategies.
A position in Groupon stock, even at the lows, is a bet that this time will be different. But there’s simply little, if any, evidence that that will be the case. This isn’t a play based on a real turnaround, but rather on unlikely hopes that something, somehow, will change. Between the company’s model, the strategy, and the results, those hopes seem far too thin.
As of this writing, Vince Martin has no positions in any securities mentioned.