Is Groupon a Bargain for the Value Group?
More than a year ago, while the big boys on Wall Street were
rating Groupon a "Buy," we casted serious doubts about the
company's future in a Gurufocus article, Groupon's Wild Profits Face Challenges . At the
time, Groupon is trading in the $20s, now the stock tumbled to
about $5. Some of us are wondering-- is Groupon a bargain
Groupon ( GRPN ) operates as a local commerce marketplace on the internet that connects merchants to consumers by offering goods and services at a discount on a global basis. The company's philosophy is simple: We treat our customers the way we like to be treated. And it all starts with a fair price. But a great price is only half the battle - it's also got to be a great product or service.
Andrew Mason was the mastermind behind Groupon. The discount deal on e-commerce business was the original idea of his. Mason set up Groupon for the convenience of consumers and internet users in North America and internationally. What Mason failed at was sustaining Groupon's profitability, as he was running a business with a rigid approach, rarely making necessary internal and external adjustments to the company's business model. On top of this, Mason also displayed frequent unprofessional conduct when giving interviews and taking part in important meetings. Mason's missteps, despite being the company's founder, resulted in his being relieved of his duties recently by Groupon.
Ever since Mason's firing, there have been rampant questions about the company's future outlook. Was Mason's removal justified because it needed another CEO who knew the basics of acting professionally and understanding how to run a company like Groupon in today's economy? Or was this move destined to bring the company further downhill because nobody could possibly understand Groupon's business the same way as Mason, since it was primarily his business? George Soros and Chase Coleman recently invested in the company, seeing possibly the following potential upsides:
- Groupon is currently trading at $5.25, more than 70% below its 52-week high of $18.98. With Mason having been jettisoned by Groupon, the company has a chance to be better off with the next full-time CEO, assuming he or she isn't socially awkward and can accomplish what Mason couldn't do: expand Groupon's footprint beyond the online coupon market and into product sales of its own where it doesn't have to share revenues with clients.
- The company's price-to-sales (P/S) ratio is a very attractive 1.5, an indication the stock itself could priced appropriately for prospective internet investors. Groupon's products and services have always been in demand by the public because of the discount-based business designed for those looking to save money and buy on the cheap.
Mason's tenure as CEO of Groupon can be summarized by one statement: He never acted like a CEO. He went out of his way to be quirky, goofy and eccentric. He wanted to sell an image of himself as the outlier genius who built a global enterprise while bucking conventional wisdom. Partly as a result of Mason's quirky ways, Groupon's stock plummeted to as low as $2.60, down 83% from its initial IPO in November 2011, before rebounding slightly to its current price of $5.25. Traders typically look for the new low trend to hit resistance in order to catch the upside on the famous bounce on the 52-week low. Chase Coleman , one of the country's most successful hedge fund investors, recently bought shares in Groupon, believing that the 52-week low factor was reason enough to garner up shares.
So can the next CEO return Groupon back to its IPO levels? The appointment of a strong CEO with business acumen could be a catalyst as bulls may argue that a new CEO will improve execution and better capitalize on Groupon's impressive global scale. And as long as that CEO acts professionally, it would, undoubtedly, be an upgrade. Investors were, evidently, increasingly losing trust in Groupon as evidence of Mason's behavior came out. While Mason helped create the company and implement its programs during his tenure, he failed to execute on key financial decisions and maintain a professional business atmosphere. The assumption going forward is that Groupon's next CEO cannot be more incompetent than Mason was.
Attractive P/S Ratio
Mason, through all the backlash he suffered, can be credited with the introduction of Groupon's discounted coupon model that ushered in a market of reduced prices for everyday consumer goods. The company, under Mason, expanded its operations to sell goods and services through merchants like retail shops and restaurants. It would create a payment system that would improve loyalty among its merchants and small business customers. And it became aggressive in the way that it found and built those relationships. Mason's last accomplishment before his ouster was the push of Groupon into the broader e-commerce market by focusing on sales of products and live events, with the introduction of Groupon Goods and Groupon Live, respectively. Groupon Goods was on track to reach about $2 billion in annual billings for the first quarter, according to a recent statement released by the company. Combined with a low stock price, the pending increase in sales resulting from the increased billings would create a favorable P/S ratio of 1.5 for investors.
According to Groupon's most recent financial statements, revenues climbed 30% to $683.3 million, compared with $492.2 million in the same quarter a year ago. The low P/S ratio is reflected in the discounts and reduced prices that generate widespread demand for a company's products and services, increasing the sales of the business. What allows companies like Groupon to grow and prosper is a viable product offering at a fair price in which the buyer perceives you are providing him with value. For investors, this is one factor that should serve as a source of optimism for Groupon's potential revenue growth.
Revenue Numbers below Estimates
Despite Groupon's upside in sales, it is also seen as losing the battle in many critical areas. During Mason's tenure, Groupon endured at least three quarters of results that missed analysts' expectations. The online coupon provider, exacerbating this issue, is expecting first quarter revenue between $560 million and $610 million, below consensus estimates of $647 million, according to data compiled by Bloomberg. The forecast released February 27 was the latest occurrence of revenue falling below expectations.
Groupon's below-average revenue numbers are a result of the bargaining and negotiating customers tend to engage in to get the price they want. Oftentimes, a customer or client asks for an even lower price than what is being offered on Groupon. If the settle price ends up falling below Groupon's original offer price, then there is a higher likelihood of overall revenue falling below estimates, hurting the company's bottom line. During the last quarter, profit margins had already reached negative levels, as Groupon reported a profit margin of -2.3%. It is one thing to bring in revenue but it is another to fail to break even. If you aren't generating enough revenue to make a profit, then long-term prospects are in question. For Groupon, those negative profit margins are threatening to leave Groupon short of cash.
Decreasing Cash Flow Hurting Groupon
Cash flow dropped significantly for Groupon: 2012 operating cash flow fell 8% to $266.8 million while free cash flow dropped 31% last year to $171 million. Analysts project that this trend isn't reversing any time soon, as it is likely to get worse before it gets better. A recent balance sheet from Groupon showed total assets of $795.6 million with only $243.9 million of cash on hand. In addition, Groupon carried short-term debts of $505.9 million of which the lion's share, $465.6 million, was money owed to its merchants or almost twice the cash on hand. That means that at the very moment it was going public, it was primarily using the merchants' cash to run its own business. The company was burning cash like there was no tomorrow and if they hadn't gone public raising fresh cash, there would have been liquidity problems.
The Next CEO's Learning Curve
Groupon's CEO situation is largely unsettled after firing Mason, the only man who knew the company's business inside and out. The next full-time CEO is faced with the challenge of learning Groupon's business in a short period of time.
The company may not have anyone who can step in and lead the company to some kind of resurrection, given that the company was primarily Mason's vision. Losing a key member like Mason could also mean that Groupon's future growth may be impaired. Only Mason, given his status as Groupon's founder, knew the business well enough to understand the company's direction and options.
For the next CEO, it could take weeks, maybe months, to fully understand Groupon's business and in a fast-moving society, that is too much time to waste. Whoever takes the top spot at this daily deals business better be a rainmaker as he or she will influence Groupon's fate and whether or not this stock will once again offer investors any value.
Groupon a Boom or Bust?
TheStreet rates Groupon as a "sell", as the area they feel has been the company's primary weakness has been its poor profit margins. On the other hand, some are betting on the turnaround of a company so popular with consumers that it is unlikely to fail any time soon. But the company's unsettled management situation combined with its business model's unpredictability could cast doubts about Groupon's future.
Disclosure: Authors have no position in the stock discussed. About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .