Shares of Groupon (GRPN) traded down on Monday morning, coming off seven highly volatile trading days that saw the stock sink 24% following a poor earnings report and then gain back most of that loss in just a few days after the departure of CEO Andrew Mason. With Mason gone, is the stock ready to continue its run? Or, will it languish at these or lower levels for a while until the dust settles?
There are lots of questions here - uncertainty might be the most prevalent fear at GRPN right now - and as an investor, questions about a company's future and its leadership worry me.
Where's the Upside?
Investors who are bullish on shares of GRPN are not buying into the stock because of its strong fundamentals, great balance sheet, or history of strong earnings. Quite to the contrary, they're building positions around the potential for a turnaround. GRPN has been beaten down pretty badly during its time as a public company. Since the company's IPO in November 2011, the company has shed nearly 73% of its value. Bullish investors are betting that shares have found a bottom and will rebound from here. The departure of Mason, whose tenure was marked with turmoil and disillusionment, sparked the recovery from the stock's post-earnings drop with hopes that a new leadership team will be able to rebuild the company from its current humble position.
Who Will Lead?
The search is underway for Mason's replacement, but it won't be an easy road to find the next CEO of GRPN. The Board, led by Eric Lefkofsky and Ted Leonsis, has already decided that they'll focus their efforts on recruiting an external candidate to lead the company. After Mason's departure, many insiders speculated that next in line to run the company was Chief Operating Officer Kal Raman, who had previously worked for competitor and industry-leader Amazon (AMZN). Analysts believed that Raman was the best internal candidate, but the outside search implies that he won't get the top spot. GRPN is looking for change - somebody with an outside perspective to lead the company towards profitability.
The Trouble with the Search
Lefkofsky is GRPN's executive chairman and co-founder, and he'll be the biggest hand in the pot once a new CEO comes on board. There are worries on the street that Lefkofsky's presence at the company will make for an uncomfortable transition for any incoming CEO, and that after a short period at the helm, the new recruit might want to call it quits. When Mason and Lefkofsky ran the company the dynamics were long-standing - as CEO, Mason was more operational while Lefkofsky focused more on oversight. Clearly, that leadership tandem didn't pan out, as noted with continued loss and Mason's firing. There will have to be a cultural shift at the top of this company in order for any change to actually take place.
How About the Stock?
As noted, shares of GRPN surged following the announcement that Mason would no longer be serving as CEO. They stretched nearly back to the highs the stock was making pre-earnings, when the street was becoming increasingly bullish on a quarterly earnings beat. Unfortunately, the earnings were a huge miss. The company reported a Q4 loss of $.12 and a FY 2012 loss of $.10 on lower than anticipated revenues. Additionally, their forward guidance for Q1 2013 was a much larger range than analysts had predicted. The overall picture was dim and it got even dimmer with earnings. The turnaround that was seemingly in place got put on hold. The tenure of Mason does not fully account for the negative direction of the stock. His departure, while good news for the company and for the underlying stock, does not signal the complete turnaround that the price of the shares have indicated. The divergence here, and the fact that the CEO search will take longer than anticipated given Lefkofsky's hand in the matter, is the reason why shares of GRPN will languish here. Until the near-term dust clears (new CEO appointed, Q1 results come in at the high end of the wide guided range), GRPN is a $5 stock.
Disclosure: I am short GRPN.