Why Groupon Might Be its Own Best Deal in 2013
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s hard to quantify how unimpressive, if not pathetic, 2012 has been for deals giant Groupon (NASDAQ: GRPN). Not only has the stock lost roughly 80% so far this year, but the company’s founder, Andrew Mason, has been honored with landing the top spot among the worst CEOs of 2012. How much worse can it get?
As it stands, Groupon’s current market cap of $3 billion highlights the company’s poor leadership and chronic failures, because only two years ago the company rejected a $6 billion acquisition offer from Google (NASDAQ: GOOG). Instead of taking the money and running, management has since run the business into the ground.
Nonetheless, Groupon seems to have a loyal base of customers and investors that still believe in its future. That’s all well and good. However, on the heels of the company’s Q3 earnings report, it seems too high of a price is being paid for such misguided devotion.
Q3 Affirms Good Idea, But Terrible Business
Groupon is a testament to why not every great idea translates into a great business. And the odds of success are more dreadful without an experienced leader at the helm. So far, Groupon is 0-for-2. The company reported a net loss of $3 million. On a per share basis, this was enough to break even. However, it represented a sequential decline even though it bested the $54 million loss in 2011.
Revenues grew 32%, reaching $569 million. It sounds good, but it was 4% short of estimates of $591 million. Likewise, gross billings were abysmal. Although the metric grew 5% year-over-year, it nonetheless represents a 5% sequential decline. This is the metric that indicates the total amount of money spent by consumers on Groupon’s deals.
Management said that continued weakness in Europe offset what has been a strong performance in North America. Investors then punished the stock, sending shares down 16% to $3.30 following the announcement. The bleeding continued the following day, falling another 20% and reaching a new 52-week low of $2.60. What's next?
Will the Business Model Ever Work?
I'd like to look on the bright side. But fundamental flaws abound. And unfortunately, Groupon has yet to convince the Street that it can sustain its business and make money. Although the company deserves credit for growing revenues in North America by 81%, sorry to say, that’s just not enough.
For instance, when a business is bleeding cash (as evident from free cash flow dropping 50% from one quarter to the next), something needs to be done. I suppose there can be a silver lining here - but it’s thin. The company is expecting a slight up-tick in performance for the fourth quarter, forecasting revenue in the range of $625 to $675 million.
That the midpoint of the range eclipsed analysts’ estimates of $635 million demonstrates the company's confidence. But execution is what matters. Plus, management assured investors of better international performance and said that it is working to improve (among other things) mobile support, personalization as well as improvements in its deals mix. But will it be enough?
…Another Person’s Treasure
All of that said, Groupon still has a chance to become 2013’s best deal. As I indicated earlier, following its Q3 report the stock dropped to a new 52-week low of $2.60 – except it didn’t stay there for very long. Tiger Global Management LLC, a hedge fund operated by Chase Coleman and Feroz Dewan, immediately acquired 65 million shares of the company, which equates to 9.9% for $202 million.
Although I can say one person’s trash is another person’s treasure, make no mistake, this was not an impulsive move. Prior to this acquisition, Tiger Global had already owned over 1 million shares of Groupon. Also, among many of the fund's other holdings is none other than Google, in which it owns over a half billion ($527 million) worth of shares. So let’s make the connection.
Two years ago, Google offered $6 billion for Groupon. It didn’t work out. However, according to a recent Bloomberg report, Google might be reconsidering another bid. On the rumor alone, shares of Groupon soared 23%. With ties to both companies, it’s hard to imagine that Tiger Global’s “faith” in Groupon was blind. I’m not saying… but I’m just saying.
In other words, poor fundamentals or not, there is very limited downside risk in Groupon from current levels. And if the stock only reaches a share price of $10.51, which is the midpoint of its 52-week high, Tiger Global may end up making out like a bandit in 2013 with gains of almost 120%. So let’s do the math: an investment of $202 million can potentially turn into almost half a billion ($445 million) in one year. Not a bad deal.
For Tiger Global, I can be cynical and say that it’s not hard to have that level of confidence when one has that type of capital. On the other hand, a cash hoard of that level is not amassed without these types of risks. For regular investors though, the company still has to execute.
Although a new “floor” has now been placed for the stock with this latest investment, organic growth is still the challenge. Groupon must nevertheless prove how it will ever earn a profit. With little to no competitive leverage this is going to be tough. The good news is the company has just been given more life. But as with every Groupon deal, there’s a date of expiration.
rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!