2023-06-26 12:00:08 ET
Summary
- Groupon, Inc.'s revolving door of CEOs raises concerns about stability and long-term growth.
- The selection of merchants on Groupon's platform is a challenge, leaving limited appeal for customers.
- Groupon's revenue growth rates have consistently declined, indicating a structural problem with the business.
- Groupon's net debt position and the need for additional financing highlight the looming troubles the company faces.
Investment Thesis
Groupon, Inc. ( GRPN ) is a business that has fallen out of favor with investors. I recognize the appeal of buying into a stock that is down very close to all-time lows. There can be the occasional bump along the bottom, where the stock can soar more than 50% in a month. However, I suggest investors avoid this name.
To sum up my contention here, I argue that investing in Groupon is a risky investment strategy. And that it will be difficult to compound one's wealth by investing in this sort of business.
Why Groupon? Why Now?
On paper, the idea of Groupon makes a lot of sense. Groupon provides customers with access to discounted deals. Meanwhile, for merchants, this generates extra traffic, so there's an appeal for merchants too.
The problem for Groupon is in the selection of merchants that end up on the platform. High-quality merchants are rarely inclined to discount their offerings and embrace Groupon's two-sided marketplace to generate traffic.
So what's left with Groupon, are businesses that have limited appeal, that are hopelessly striving to increase traffic to their stores. And as a consequence, for customers, it ends up being somewhat similar to a revolving door, where customers check out the platform, but rapidly leave the ecosystem as they see little value in the businesses that are offering a discount.
And talking of revolving doors, consider this. Dusan Senkypl is the newest Groupon CEO . He takes over from Kedar Deshpande, who took over from interim CEO Aaron Cooper in December 2021. Meanwhile, Cooper took over from Rich Williams in March 2020.
Meaning that in just over 3 years, there have been 4 CEOs (including the interim CEO) at the helm of Groupon.
Revenue Growth Rates Are Pointing in the Wrong Direction
The point I wish to make is this, Groupon's problems are not temporary. There's a structural problem with the business that can best be highlighted in the graphic above.
A business is not supposed to be reported so many consecutive negative y/y declines in revenue growth rates. In fact, one has to go reverse the clock for more than 5 years, for the last year that Groupon reported positive growth rates.
That's not a viable business that will allow one to grow one's wealth.
With that in mind, let's spend a few moments on its balance sheet and discussing its profitability profile.
More Trouble Looming
Allow me to highlight a quote from the earnings call,
[We are] seeking additional financing from both the public and private markets through the issuance of equity or debt securities , and potential monetization of certain non-core assets, including our stake in SumUp, ownership of GiftCloud and our portfolio of Intellectual Property. (Emphasis added.)
Groupon is clearly stating the business has structural problems and that they required additional financing.
Presently, Groupon holds a net debt position of $100 million. This doesn't sound terrible, particularly given that its ownership of SumUp is valued at approximately $120 million.
But this naturally begs the question, what happens after Groupon sells its stake in SumUp? Groupon sells SumUp, it uses that cash infusion to pay down a portion of its debt, and then what?
Let's recall, Groupon just ended Q1 burning through slightly more than $85 million of free cash flow. Even while cutting back on expenses to the bone, it's difficult to imagine that this business will be around in another 3 years.
The Bottom Line
Investing in Groupon is a risky proposition.
While the concept of providing customers with discounted deals and generating extra traffic for merchants seems appealing, Groupon struggles to attract high-quality merchants who are reluctant to discount their offerings.
As a result, the platform is left with businesses of limited appeal, leading to customers quickly losing interest.
Furthermore, the company's revenue growth rates have consistently declined, indicating a structural problem.
Groupon's recent announcement of seeking additional financing together with its net debt position raises concerns about its financial stability.
Even with potential asset monetization, it remains uncertain whether Groupon can sustain itself in the long term, especially considering its negative free cash flow.
The revolving door of CEOs at Groupon spins with such velocity, where CEOs change faster than a discount code, and even the most dedicated bargain hunters struggle to keep up, questioning if the company can ever break free from this perpetual cycle.
I recommend investors steer clear of Groupon, Inc. stock due to its inherent challenges and uncertain future.
For further details see:
Groupon's Revolving Door: A Risky Investment Proposition