seewhatmitchsee
Investment Thesis
I wanted to take a look at Groupon (NASDAQ:GRPN) after it rallied around 300% since the bottom in May of this year. I wanted to look at the company’s historical financials to see why the company has lost 97% of its total value in the last decade and if there is a turnaround in sight. Looking at the financials and modeling quite optimistic profitability, the company is still too expensive and would be a pure speculation play on the new management’s ability to turn around the company, therefore, I give it a hold rating and new investors shouldn’t risk their money here until we see results.
Outlook
The stock traded as low as $3 a share just back in May. It seems like investors are being very hopeful about the new management that recently took over, which may signal that the company will see a turnaround. The new CEO Dusan Senkypl is an entrepreneur who is very excited to transform the company and has eight pillars outlined that will help the company become more efficient and profitable. The costs have been fluctuating dramatically over the years, which led to negative net margins for 4 out of the last 5 years of the business. The company is burning cash to keep on surviving, getting into debt to keep operations going, which is not an ideal way of doing business for sure.
The outlook, therefore, is very murky as the CEO and CFO just recently took over the reins of the company and will have a lot to prove to everyone. I would like to see further improvements in operating margins and get them to positive levels for a couple of consecutive quarters before I consider what they did a success. Another thing that makes me a little worried but also appreciative is that the CFO Jiří Ponrt said in the latest earnings call that the transformation plan “may not alleviate substantial doubt about our ability to continue as a going concern.” At least the management is being real here and not touting that the plan is going to be successful, and everything is going to be alright now that they’re in charge.
The management is not the only one that is positive as one advisory firm has recently increased its stake in GRPN to 8.6% as they believe the shares could rise to around $55 a share. That is quite the statement to make, and of course, they would be bullish, it’s in their interest.
Financials
As of Q2 ’23, the company had $118m in cash, which is a decrease of around 60% from FY22 reserves, against $225m of long-term debt, which are convertible bonds. These notes carry around 1% interest and can be converted into shares if the price reaches above $68 a share, which is very far from current valuations, so I think this debt will stay as debt and the company will keep paying the interest. For a company like Groupon that is not making any profits and is down $40.6m in net income as of Q2 ’23, the debt is a serious concern for me. I don’t think the company is very safe if it cannot turn the ship around quickly enough.
The current ratio has been below my minimum standards of 1.5-2.0 and is well below 1 also as of the latest quarter, which means the company may be having some liquidity issues. The long-term trend is going down without any rebound in sight as of yet.
Current Ratio (Author)
The company’s ROA and ROE have been negative 4 years out of the last 5 and that is not a good sign either and tells me that the company is not being efficient with its assets and shareholder capital.
Groupon has also lost any competitive edge or moat that it may have had in the past and I don’t see any turnaround on the horizon. I’m looking for at least 10%.
ROIC (Author)
In terms of margins, gross margins improved considerably in FY22 and as of Q2 ’23 stayed at about the same level, which is good. Operating margins also improved quite a bit; however, these are still negative, which means there is a lot of work to be done before the company becomes profitable once again. Operating margins went from -32% in Q2 ’22 to -14% in Q2 ’23.
Margins (Author)
Revenues have plummeted in the last decade which can explain the performance of the stock price alone, but coupled with other metrics it is easy to see why it lost most of its value.
Revenue decline (Author)
I do not see much positive in historical metrics, with slight improvements in the last 2 quarters, however, it is too early to tell that the company is going to turn positive anytime soon so a large margin of safety is needed.
Valuation
I have to take a hypothetical approach to the company’s revenue growth. Analysts’ estimates predict -15% in FY23 and around 1% going forward. I’ll be conservative and say the company stopped bleeding revenue and after FY23, revenues will grow at around 3% until FY32. For my optimistic case, I went with a 5% CAGR, while for the conservative case, I went with 1% after FY23 until FY32.
I don’t think I can speculate on higher growth since the management hasn’t provided any optimism in that regard.
For margins, I had to assume the cost-cutting measures of the new management have worked out and went with a positive operating margin of 17% in FY23 that improves to 23% by FY32, bringing net margins from -40% in FY22 to +9% by FY32. Is it too conservative or too optimistic, I’m not sure, however, I do know that it’s better than what the company has been doing recently.
On top of these estimates, I will add a substantial margin of safety due to how bad the financials are and the speculative nature of the whole situation. I went with a 40% margin of safety which I think is enough of a cushion. With that said, Groupon’s intrinsic value is $7.31 a share, which implies that the current valuation is still too high.
Intrinsic Value (Author)
Closing Comments
There could be an opportunity for a decent bounce if the management is going to be successful in turning the ship around. The advisory firm seems to have faith in a turnaround that could rocket the shares up to $55 a share by the end of the year, which I think is quite optimistic.
If I was to take on such a risk, I would need the company to come down at least another 40% before I jump in with a small position because it is very speculative. My model assumes that the company starts to produce positive unlevered free cash flow, which in the last 2 years, was deep in the negatives, so, take the valuation with a grain of salt and a starting point for your further investigation into the company.
I’m not going to suggest selling your shares right now because I would be very interested to see what the new management is going to do with the company and hope that they can turn the ship around and be more streamlined and profitable once again.
