Remember when Groupon (NASDAQ: GRPN) was a popular tech name? Back in 2011, Groupon stock was changing hands for over $500 apiece. Since then, it has fallen a long, long way. Last year, it was trading for under $4 at some points.
But it has risen 25% so far this year – and 146% over the past year. Here are three things I like about the Groupon investment case.
1. Established name in a shifting market
Groupon has come a long way from its early days selling group deals.
It has shifted to a more localised approach focused on individual deals that help drive traffic to local businesses. In that sense, it is tapping into some of the large markets that used to be dominated by adverts in local newspapers like the Bolton News and Shetland Times.
The company’s pivot shows that it has been learning from its mistakes and is willing to evolve to stay relevant in a shifting digital marketplace. It has a known brand, large customer base and technical expertise that help it do that.
2. Financial performance is improving
Groupon is now benefitting from a management team that has substantial experience in digital marketplaces in central Europe. The chief executive represents an investor that owns over a fifth of all Groupon stock. That suggests management has both the intention and capability to turn the ship around.
I think that is starting to show in the company’s financial performance. In the first quarter, revenue of $123m was just 1% higher than the same period last year. But that meant consolidated revenues returned to growth for the first time since 2016.
Even better, the basic net loss per share fell 65%. I would prefer a business that is profitable so, for now, I will not be buying Groupon stock. Nonetheless, I think the sharply reduced loss is significant. Management seems to be making the business more efficient. That can let it benefit from its strengths, which I think could lay the foundation for long-term financial success.
With $159m of cash at the end of the quarter (equivalent to over a quarter of its current market capitalisation), I think the company is in a strong position to improve financial performance and start turning a profit.
3. Large potential audience
The quarter was not all good. Active customers fell 6% in North America and by 19% internationally year-on-year.
Then again, shedding some customers while growing revenues and reducing losses may be the right medicine. Sometimes, certain customers cost a business money rather than making it. Groupon’s strategic approach to targeting selected markets is paying off, in my view.
If it can prove that model is right, the potential market size is significant – and it is only scratching the surface.
I’m waiting and watching
But while there are reasons I would consider buying Groupon stock, I do see some red flags. It is still loss making, the customer loss could be more problematic than I expect and the business is essentially in turnaround mode. A lot of work is yet to be done.
So for now, I am watching keenly without buying.
