2023-10-12 16:51:50 ET
Summary
- Groupon shares are up ~20% this year, signaling confidence in the new management team's turnaround plan.
- The plan aims to stabilize revenue growth, improve marketplace supply, and move toward profitability, but execution and consumer behavior remain uncertain.
- The stock recently dropped more than 20% on its decision to sell non-core assets, which I view to be a positive.
- In light of many operational risks, I'm neutral on this stock at a ~7x adjusted EBITDA multiple.
Even though the stock market has been incredibly volatile over the past few months, stocks do remain up sharply on the year, especially small and mid-cap companies that shed a lot of value in 2022. Amid high interest rates, however, investors have to be incredibly careful of the companies they put in their portfolios, as now is a poor time to be betting on speculative plays.
Groupon (GRPN), as a major turnaround story, is exactly the type of speculative play to be very wary of. The online deals site is up ~20% YTD in a bid of confidence in the company's new CEO , as it attempts to entirely overhaul its business.
I'll cut to the chase here: I am now neutral on Groupon after seeing new management quickly turn the company to adjusted EBITDA profitability (from a prior bearish view made last year). I'm also more sanguine about the company's prospects after a recent sharp drop following its decision to sell some non-core assets , which I view as simplifying the business to its roots and helping to raise cash. It's easier to see the value element for Groupon now that the company is back to stabilizing revenue growth and a positive bottom line, but still, there are risks that we have to be mindful of:
- Can Groupon effectively preserve its brand while lowering marketing spend? The company's local deals have been, in part, washed out by offerings like Airbnb Experiences. Groupon still has a base of customers, but this base is declining regularly.
- Does Groupon have sufficient liquidity? The stock has pushed into very small-cap territory, and it is in a net debt position while also burning through negative FCF.
The below slide lays out Groupon's new turnaround plan:
The company has been turning over its executive ranks, with a new CEO and CFO from Pale Fire Capital, which holds over a 20% stake in Groupon and is keen to protect its investment. It has immediately slashed SG&A spending (more on that in the next section) and is revisiting its marketing budget to focus more on performance marketing rather than on consumer promotions. And, the company wants to improve the supply side of its marketplace (the businesses offering deals and promotions to Groupon's website visitors) by strengthening its sales team and appropriately incentivizing new accounts.
This all sounds workable, but the key question is execution: will this formula work for consumers? A log in to the site on my side shows deals for local photo shoots, spa sessions, and bowling. The issue is: do consumers still shop this way, through the hassle of third-party deals?
The bottom line here: stronger financial performance and a return to adjusted EBITDA profitability have kept me from being overly bearish on Groupon, but I'm still uncertain that the company has a rosy long-term future. Stay on the sidelines here and don't chase the company's recent upward drive.
Recent trends show moderating revenue declines amid a shrinking customer base, improved profitability
Let's now go through the latest financials that have taken hold since Groupon's new management has settled in.
The good news: in Q2 (the June quarter), Groupon showed that revenue had effectively bottomed out in Q1 and returned to sequential growth. On a y/y basis, revenue of $129 million still declined -16% y/y: driven both by weaker engagement on consumer offers in North America as well as tough comps from exiting the Goods business internationally.
Still, we note that Groupon's revenue beat Wall Street's expectations of $135 million (-11% y/y), and that this level of revenue was achieved with a meaningfully lower marketing spend of $22 million - or just 20% of revenue, compared with 24% in Q1 and 22% in the year-ago Q2. This is core to Groupon's strategy to reduce reliance on promotions and focus on high-impact performance marketing.
Groupon's management is expecting revenue to continue declining in Q3 and Q4, but at a more modest rate than in Q2 - suggesting that we've reached a near-term bottom if management's optimism plays out. The company expects to return to positive y/y comps in the Local business by early 2024.
Still, we are cognizant of the fact that Groupon's active customer base continues to shrink.
As shown in the chart above, the company lost 100k International customers in the quarter and 300k North American customers in the quarter, a function of both weaker engagement as well as reduced marketing spending.
Here are new CEO Dusan Senkypl's prepared remarks on the Q2 earnings call , detailing the company's new approach to marketing:
In the second quarter we began the process of gradually reducing our reliance on promotions. I do not expect progress here will be linear. A key enabling project will be shifting to a personalized approach. We took an important step on our personalization projects with the launch of our new purple prices product.
Turning to paid marketing, we made great progress in rebuilding our performance marketing stacks including search engine marketing and display channels and also improved the connection between our marketing campaigns and our top deals. With the benefit of a stronger foundation we started increasing our paid marketing spend in the quarter and saw our gross profits from performance marketing return to year-over-year growth in June.
We believe our performance marketing channels are ready to receive additional investment and are looking to ramp up further in Q3."
The company also believes that boosting supply coverage and availability is key to returning to growth. At present, Groupon's sales teams are focused only on the top 5 North American markets; the company wants to shift focus to the top 23 in the hopes that Groupon can achieve critical mass in more cities to revive its customer base and revenue.
For the moment, the company has dropped SG&A spending to $96 million, down an impressive -22% y/y:
This has enabled Groupon to hit positive adjusted EBITDA of $15 million in the quarter, or a 12% margin - versus a 4% margin in the year-ago quarter. The company expects to continue generating positive adjusted EBITDA through the remainder of FY23, but is evaluating an increase to its sales headcount to support broader regional coverage in an attempt to boost marketplace supply.
Note as well that despite positive adjusted EBITDA, the company burned -$42 million of operating cash flow in the second quarter (and -$119 million in the first half of the year). Against barely under ~$250 million of cash on the company's balance sheet, there's not much liquidity room to spread further if losses continue at the same pace.
Valuation and key takeaways
At current share prices of just under $11, Groupon trades at a market cap of $335.7 million. After we net off the $237.6 million of cash and investments against $302.7 million of debt on Groupon's latest balance sheet, the company's resulting enterprise value is $400.8 million.
If we assume flatlining and annualizing adjusted EBITDA from Q2 levels (with benefits from reduced marketing spend potentially offset by increased sales hires), against ~$60 million of annualized EBITDA the stock trades at 6.7x EV/adjusted EBITDA - a bargain, but one that's justified in my view given a myriad of operational risks.
I'd prefer to maintain caution here and not have too much confidence in the stock's recent momentum.
For further details see:
Groupon: Early Shoots Of Green, But Can This Fading Company Be Saved?