This article was originally published on Nov. 11, 2015 and updated on April 6, 2016.
Source: Groupon
Groupon (GRPN -3.81%) is a fairly volatile stock, and performance tends to be quite unstable. However, returns over the long term have been really dismal for investors, since Groupon stock is down by more than 80% in the last five years. Should investors capitalize on the opportunity to buy Groupon stock at discounted prices, or is it better to stay away from the company until there is some kind of light at the end of the tunnel?
Why Groupon stock is getting hammered
Groupon is in a difficult situation. Most customers don't find the company's daily email offerings particularly exciting, or even relevant. Management has been trying to generate growth with initiatives such as expanding internationally and venturing into e-commerce, but this strategy has produced disappointing results so far.
The company reported a 1% decline in gross billings (the total dollar value of customer purchases) during the fourth quarter of 2015. This drop was mostly due to currency headwinds, though, as gross billings grew 4% year-over-year in constant currency. Revenue came in at $917 million during the period, a 4% increase versus the same quarter last year and growing by 9% in currency-adjusted terms.
The company is losing money on a GAAP basis, and management fully admits that Groupon needs to accelerate growth and improve profitability. In this context, the company is implementing different strategic initiatives to jump-start performance in the coming quarters: significantly increasing marketing expenditures, streamlining international operations, and moving away from low-margin categories in e-commerce.
Management intends to transform Groupon into a more focused business, spending more marketing money in North America and select markets, while reducing the company's presence in less promising product categories and geographies. This sounds like a reasonable strategy, but it's really hard to tell what kind of impact it will have on both sales and margins over the coming quarters.
For 2016, the company is expecting revenue in the range of $2.75 billion to $3.05 billion. That doesn't sound very promising in comparison with approximately $3.06 billion in forecasted sales this year. The way things are going, it appears investors in Groupon should get ready for unpredictable performance in the middle term.
Not a good deal
Groupon isn't the only company facing big difficulties in the discount-coupon business. Even the almighty Amazon (AMZN 2.29%), one of the most powerful and successful companies in the online world, is having a hard time in the sector.
Amazon has invested nearly $200 million in LivingSocial, one of Groupon's closest competitors, yet Amazon's 10-K report for 2015 shows that LivingSocial is also losing money at the operating level, and LivingSocial has recently announced that it will be laying off nearly 50% of its workforce. Back in 2015 Amazon also exited its Amazon Local business, another daily deals site competing directly against Groupon.
RetailMeNot (SALE) is another company reporting major problems in the online coupons business. The company announced a 5% decline in revenue during the fourth quarter of 2015, while sales over the full year declined by 6% versus 2014 levels. The key variables are not moving in the right direction over the coming months. Far from it: RetailMeNot is expecting a 14% revenue decline during the first quarter of 2016, while total sales for the full year are forecast to fall by 7% annually.
It's not only that Groupon is delivering disappointing financial performance. Companies such as Amazon and RetailMeNot are confirming that there is little room to make money in online coupons and daily deals. The industry environment will most probably remain fierce in the future, putting additional pressure on Groupon and its chances for a sustained turnaround.
Expectations are quite low for Groupon at this stage, so the stock offers huge upside potential if management can lead the company toward a sustained improvement in sales and profits. However, that doesn't make Groupon stock a smart purchase. You get what you pay for with this company, as there's little visibility on when or how things will turn for the better.
