Groupon: Making The Right Moves, Worthwhile Looking Into
Summary
- With $750 million in cash on its balance sheet, something positive may happen.
- The near-term potential is likely to be unimpressive, and its revenues will continue to compress.
- Worthwhile following from the sidelines for any positive developments.
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Investment Thesis
Groupon (NASDAQ:GRPN) trades close to an all-time low. However, it still has $750 million of cash on its balance sheet - a high figure for a company trading for approximately $750 million.
Also, it has very strong insider ownership, as well as institutions holding its stock.
Given the very recent exit of its CEO and COO, together with the implementation of its position pill, this company may still have some life left in it.
Therefore, I'm reversing my bearish position I've held on this company and I'm now advocating for cautiously watching it from the sidelines.
From Postponements to Poison Pills
With a significant delay since Groupon's last reported results, the company will reveal its highly anticipated Q1 2020 results on the 16th of June for the quarter ending March.
Given that the company has been through a turbulent period, with its shares fully collapsing, together with its CEO and COO having to abandon ship, it appears fully reasonable that its reporting has taken slightly longer than normal.
Further, it has recently adopted a poison pill policy, which lasts until March next year. Its poison pill essentially states that if an entity is acquiring more than 10% (for active funds) or 20% (for passive funds), the company will substantially dilute the total number of shares outstanding.
Put simply, the poison pill (Rights Plan) works to give the company approximately a year to demonstrate to the community that its prospects are undervalued.
Financial Position - Impressively Strong
Accordingly, this move forced me to question its prospects. Indeed, we can see that Groupon has $750 million in cash and equivalents on its balance sheet. This is offset by $250 million in the form of its convertible notes.
Indeed, there's a clause in the rights plan to prevent shareholder group A-G Holdings, which already owns 7.5% of Groupon (page 57), from converting its $250 convertible notes over the coming year, thereby increasing its ownership of Groupon past this critical 10% threshold.
In actuality, even though I've been tremendously bearish Groupon's prospects, and thus far been proven right, I question whether this still holds weight now? After all, its present market cap is $770 million, which given its net cash position is approximately $500 million implies that the underlying trading equity is somewhat cheap.
The New Vision? The Promise Land? Or Out of Desperation?
At the time of its reported Q4 2019 results back in March, the company declared it was going to exit its Goods category and focus on Local experiences market:
Source: Q4 2019 Press Statement; North America Segment
As can be seen above, Groupon's Goods segment makes up approximately 47% of total revenue, but less than 15% of the company's North America gross profits.
Note that largely similar dynamics take place in Groupon's International segment, but I've chosen to focus on its more mature operations in North America.
Accordingly, Groupon's Goods category is barely profitable, and the company believes that it would be best to deploy energy towards higher-margin operations like Local.
Nonetheless, compounding the issues for the company is that its Local segment is likely to have taken a significant hit on the back of COVID-19 and the lockdowns.
Thus its near-term results will be less satisfactory than its potential in the fullest could turn out to be.
Long-Term Prospects? Will Investors Give It The Benefit of the Doubt?
Below are the company's 2022 long-term targets:
(Source)
Although 2019 was not a promising period for Groupon, it nevertheless still reached 10% EBITDA margins - $228 million adjusted EBITDA.
Hence, given that the company is asking investors to be patient, will it turn its ship around? The promise of high-teens adjusted EBITDA margins more than two years away might sound rewarding in principle, but I question whether this is enough of a carrot for shareholders.
Valuation - Not Expensive
Here's the main issue. It's difficult to make the argument that Groupon is a clear cut in the bargain basement.
Because although it has fallen from grace and it trades for just 0.3x times its trailing sales, it has been largely losing relevancy as its revenues have been trending lower for more than six years - since 2014.
On the other hand, I can't claim that, given the company's motivations to improve its operations, fire its CEO and COO, as well as implementing the position pill, it is expensive.
The Bottom Line
On balance, Groupon appears to be resistant to throwing in the towel.
Even though its shares trade near an all-time low, there is plenty of interest involved in not letting the company's equity sink. Its roster of shareholders includes none other than Alibaba (BABA) which owns 5.8% of Groupon's stock.
Even though it is difficult to reconcile the fact that its revenues continue to compress, there's nevertheless the fact that with $750 million of gross cash, this company with a market cap of just over $750 million might still have one final flash in the pan.
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Comments (15)
'It is clear to me, and I’ve heard the same internally, that they have been dealing with very severe liquidity issues since COVID.'Respectfully, this is nonsense. Not 100% sure why you are saying this. But anyway, good luck.
It's an asset-light business, Ted. It doesn't need any assets. It just needs cash. Its balance sheet is strong. Page 58
www.sec.gov/...Thank you for your comments.