Groupon (NASDAQ:GRPN) stock slid sharply last Wednesday after the online-discounts platform reported fourth-quarter numbers that didn’t quite live up to expectations. Management also provided downbeat 2019 profitability guidance. In response, Groupon stock dropped more than 10%.
This sharp drop of Groupon stock is warranted. Broadly speaking, Groupon’s turnaround is progressing, but at a much slower pace than anticipated, and at a much slower pace than had previously been reflected by Groupon stock. As a result, the near-to-medium term upside of GRPN stock is capped by an unfavorable convergence of slowing growth and the stretched valuation of the shares.
Groupon can survive over the long-term as an online-discounts platform, and it can drive sustainable growth by emphasizing local activities. That strategy should power Groupon stock to prices well over $5 in the long- run.
But it will take time for GRPN stock to reach $5 again, and its potential return isn’t all that attractive at this point. Overall, that means investors should wait for the stock to fall further before buying GRPN stock on weakness.
Groupon Has Staying Power
There are plenty of bears out there who think that Groupon’s time has come and gone, and that the commerce world of tomorrow has no need for an online-discounts platform.
I don’t think that’s true. Sure, Groupon’s customer base isn’t growing. But it’s not dropping by a material amount, either, and e-commerce giants like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) are already aggressively discounting everything. Thus, it seems that loyal Groupon users will remain loyal Groupon users, regardless of how much large retailers reduce their prices. Consequently, GRPN will likely survive over the long-run.
But Groupon also has growth potential. We are shifting to a society in which consumers value experiences over products. Experiences aren’t sold by Amazon or Walmart. But Groupon offers discounts on experiences through its platform, meaning that the company is perfectly aligned with the experience mega-trend.
Over the next several years, GRPN needs to double down on local experiences and provide more discounts on experiences that can’t be purchased through Walmart or Amazon. If the company successfully executes this strategy, its customer base could start to grow again. Furthermore, embracing voucherless transactions and improving the experience of customers who use mobile devices could also reinvigorate the platform’s growth.
Overall, Groupon is positioned for a nice turnaround over the next several years.
Fourth-Quarter Numbers Underscore the Slowness of the Turnaround
Although GRPN has turnaround potential, its fourth-quarter numbers imply that its turnaround will progress at a snail’s pace.
The company’s Q4 gross billings and revenue dropped by high-single digit percentage levels year-over-year, continuing a multi-quarter streak of high-single-digit drops in both of those categories. For the third consecutive quarter, the number of Groupon’s active customers dropped slightly versus the previous quarter.
Groupon’s margins are improving, but its margins increased by the slowest pace pf any quarter in 2018. Meanwhile, its guidance calls for its adjusted EBITDA to be roughly flat YoY in 2019. That implies some combination of continuing revenue declines and decelerating margin expansion.
In sum, the numbers weren’t great. But, as outlined earlier, there is potential for the numbers to turn around over the next few years as the company doubles down on experiences, goes voucherless, and improves its mobile interface. Still, such improvements will take time, and they will generate a small financial boost.
Over the next few years, however, Groupon’s revenue losses will stabilize. By emphasizing experiences, GRPN will be able to slightly grow its customer base and its revenue. As a result, its gross and operating margins should trend slightly higher due to the combination of cost-saving measures and steady top-line growth, enabling its profits to increase slowly and steadily.
All in all, by fiscal 2025, I think Groupon’s earnings per share can reach 40 cents. Applying the market’s average forward multiple of 16, that implies a fiscal 2024 price target for Groupon stock of over $6. Discounted back by 10% per year, that equates to a 2019 price target of under $4. That is where GRPN stock trades today, so its upside over the next several months seems limited.
The Bottom Line on GRPN Stock
Groupon’s turnaround is still happening. It’s just happening at a much slower pace than anticipated. As a result, Groupon stock is resetting due to slower growth assumptions. That adjustment will ultimately keep Groupon stock stuck in neutral for the next few months.
As of this writing, Luke Lango was long AMZN.
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