Groupon's (NASDAQ:GRPN) 80 percent IPO loss is quite a decline in this day and age. However if you look back to the late 1990s and early 2000s, it happened everywhere in the internet sector. A lot people consider Groupon as a doomed company that will eventually go bankrupt. At the same time, Groupon did not do enough to prove these people wrong, especially when Q3 results came out.
The 9.9% share purchase by Tiger Global was a vote of confidence. However, I do not think investors should consider this as the signal to initiate a long position in Groupon . If management does not have extraordinary plans to change business strategy, and things stay the same in the next few quarters, the company will likely continue its downward trend.
On one hand, we see a company lost close to 90% value from its peak. On the other hand, we also see a great risk/reward opportunity here. In my experience, there were a few opportunities similar to Groupon's, and they paid off nicely to people who invested in them. Off the top of my head, there are Las Vegas Sands (NYSE:LVS) and Bank Of Ireland (NYSE:IRE). In 2009, Las Vegas Sands almost went bankrupt due to solvency problems caused by accounting issues. Its share price went as low as $1.38. However, the company survived and is now priced around $45. The other one is Bank Of Ireland which lost 99% of its market capitalization to $0.66 per share. In only a few months, IRE recovered to $20. I am fully aware that Groupon, Las Vegas Sands, and Bank of Ireland are different companies in different sectors and Groupon's situation is different from LVS and IRE. The one similarity is that, at one point, a lot people thought these companies would go bankrupt, but they survived and paid nice returns.
Sure, the forward P/E works well for most companies, but Groupon is not like most companies. It is one of its kind, and it was analyzed with too much speculative growth and future revenue. For a company like Groupon, use the easiest analysis to calculate the entry points may work the best.
|Consolidated Balance Sheets|
|(in thousands, except share and per share data)|
|December 31, 2011||September 30, 2012|
|Cash and cash equivalents||$||1,122,935||$||1,201,011|
|Accounts receivable, net||108,747||110,058|
|Prepaid expenses and other current assets||91,645||121,338|
|Total current assets||1,323,327||1,432,407|
|Property and equipment, net of accumulated depreciation of $14,627 and $37,564, respectively||51,800||103,876|
|Intangible assets, net||45,667||51,447|
|Investments in equity interests||50,604||131,039|
|Deferred income taxes, non-current||46,104||48,753|
|Other non-current assets||90,071||68,314|
|Liabilities and Stockholders' Equity|
|Accrued merchant payables||520,723||573,477|
|Deferred income taxes, current||76,841||75,203|
|Other current liabilities||144,673||171,422|
|Total current liabilities||995,162||1,125,201|
|Deferred income taxes, non-current||7,428||28,585|
|Other non-current liabilities||70,766||74,643|
I would start to consider purchasing shares or options when Groupon share price enters into these range below.
1) One entry point is based on Groupon's current asset: Current Asset/share=$1.432B/655M=$2.19.
2) One billion dollars market capital entry point:$1 billion Market Cap/Share=$1B/655M=$1.53.
3) Unrealistic but possible entry point is working capital entry: (Current Asset- Current Liability)/Share=(1.432B-1.125B)/655M=$0.46. Entry point $0.46-0.55. At this point, I would not even touch the stock unless I want to gamble on a possible short term bounce for some quick money. A better way to gamble is just take that money to a casino to play roulette.
4) My entry point is (Total Asset- Current Liability)/share=($2.033B-1.125B)/655M=$1.37. Counting into the momentum factor and resistance factor, entry point is between $1.30-1.50. An overall 95% price decline from Groupon's all time high.
I would buy call options that have long expiration, such as January 2014, January 2015 out of the money Calls. If the share price is low enough, I would buy the actual shares to avoid the time limitation on the calls.
A good investor is the one with discipline. Groupon may never go as low as the prices stated above. However, if an opportunity presents, I will not hesitate to initiate a long position within my price range. It is only because the possible payoff is far greater than the risk ... if it does pay off.