It’s hard to believe that Groupon (NASDAQ:GRPN) went public more than seven years ago. It’s even harder to believe how far GRPN stock has fallen since an initial public offering that priced 35 million shares at $20 a piece.
At the time, the $700 million offering was the second-biggest tech IPO in history, behind the $1.7 billion Google raised in 2004. How the might have tumbled: Today, you can buy almost seven Groupon shares with a Jackson note.
But seriously, it always amazes me how some dubious stocks captivate the minds of regular investors, while other well-run businesses go begging for investor attention. I guess people will always love watching car wrecks; Groupon is one of those in no uncertain terms.
But I’m not here to bash Groupon or GRPN stock despite the fact the company would have to pay me to own its shares — and I’m not talking about dividends.
Buy-and-hold investors, like me, have no business even considering a stock like Groupon. That said, if you’re the type who relishes a lot of risk in your investments, or should I say, speculation, trading in and out of GRPN stock isn’t the worst idea in the world.
It’s a Contrarian Magnet
I didn’t coin this phrase. My InvestorPlace colleague Josh Enomoto did in his most recent article about the company best known for providing group deals. “History tells us that when GRPN stock is bleeding, it’s a perfect time to buy. But this time, investors should abandon this ‘logic,’ Josh wrote on Dec. 6.
Then, in the very next paragraph, he hedged his bet a little.
“My only real caveat in remaining bearish on GRPN stock is that it’s a contrarian magnet. Traders love this company for its all-or-nothing beta. But, fundamentally, Groupon is as flawed as ever.”
Like I said at the top, investors love some odd stocks, even those that are fundamentally flawed.
Why Do I Consider Groupon a Speculative Play?
I haven’t written a whole lot about Groupon in recent years. However, in January 2017, I echoed Josh’s sentiment from July 2016, that Groupon stock could bounce back with some good news.
At the time of his article, GRPN stock was trading around where it is today, in the low-t0-mid $3’s. When I expressed the same sentiments six months later, GRPN had barely budged, albeit with a lot of volatility — it traded close to $6 in between, before falling back — suggesting it had built an artificial floor around $2.15, a floor that I believe is still intact.
Free Cash Flow Was Key
As part of my argument almost two years ago, I reckoned that if Groupon could get its adjusted EBITDA north of $200 million, GRPN stock would be attractive to speculators.
“Based on the average of the last three years, Groupon has turned 67.7% of its adjusted EBITDA into free cash flow. If management does the same in fiscal 2016, it will generate at least $101.6 million in free cash flow,” I wrote on Jan. 20, 2017. “So, based on this estimate, Groupon’s current free cash flow yield is 4.9%, but could be twice that if its adjusted EBITDA returned to levels above $200 million, where they’ve been for the last three years.”
In its Q3 2018 earnings release, Groupon provided 2018 adjusted EBITDA guidance of at least $280 million. Based on the 67.7% conversion ratio mentioned above, its free cash flow could be as high as $190 million, considerably more than the $78 million in generated in fiscal 2017.
Through the first nine months of 2018, Groupon’s generated $106 million in free cash flow from $165 million in adjusted EBITDA, a conversion ratio of 64%, very close to its average in fiscal years 2013, 2014, and 2015.
Bottom Line on Groupon Stock
Assuming $190 million in free cash flow in fiscal 2018 and an enterprise value of $1.46 billion, Groupon would have a free cash flow yield of 13%, well above the 8%-10% minimum yield that value investors generally require.
Am I saying Groupon’s going to hit $190 million in free cash flow in 2018? No, I’m not. However, even if free cash flow is only $117 million in 2018, GRPN stock will still yield 8% on a free cash flow basis.
I wouldn’t make the trade, but it’s easy to see why risk-takers might.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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