Groupon (GRPN -0.61%) nosedived in Wednesday trading following a massive earnings miss. The Chicago-based online marketplace company saw its stock fall by 44.3% by the end of the day as the company also announced that it would institute a reverse stock split. The market reacted by taking the stock to $1.70 per share, an all-time low.
This reaction forces Groupon bulls to make a tough decision. They must decide whether the latest strategy will eventually forge a path forward or whether they should cut their losses.
For the fourth quarter, Groupon reported earnings of $0.07 per share. That came in $0.08 per share below expectations. It also represents a decline from the same quarter in 2018, when the company earned $0.10 per share. Revenues of $612.3 million fell 23% year-over-year. Wall Street had expected $709.35 million.
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Problems go beyond the numbers
It's possible Groupon wanting to initiate a reverse stock split exacerbated the price drop. The share price stood at $3.05 per share before the company announced earnings. Traders reacted to the point where after-hours trading in Groupon stock was halted in reaction to the news.
Moreover, this swoon seems to have come as a surprise to investors. Before the release of the report, Groupon stock rose by almost 7.8% in one day in anticipation of earnings. Now, the latest revenue miss marks 16 straight quarters where revenue dropped. Because of this pattern of sequential declines, Goldman Sachs downgraded Groupon stock to a sell in December. Following that news, the stock fell by 9.1%.
This stock has also failed to gain traction since soon after its IPO. Couponing made Groupon a household name in 2010. This initially led to a successful launch of its stock in November 2011. However, competition hit its revenue hard, taking Groupon stock to the single digits by 2012. Since then, brief moves above $5 per share have given way to sell-offs. This retail tech stock has seen steady declines since peaking at nearly $6 per share in November 2017.
Signs of hope
Despite the grim earnings report, the company offered some signs of hope. The company filled its vacant CFO position, naming Melissa Thomas to the post. Since Thomas had served as the interim CFO since August, the company will simply drop "interim" from her job title. Groupon also announced it would exit its Goods category. It wants to focus on the local experiences category.
Moreover, one key metric indicated that a greater focus will help the company. Amid the overall declines, gross profit per customer has risen. Before this post-earnings drop, the improving numbers on individual customers brought hope that Groupon stock could eventually benefit from a profitable niche. If the company can continue to increase its gross profit per customer, Groupon stock may yet stage an eventual recovery.
Does Groupon have a path forward?
Anything is possible, but finding a path to recovery could prove difficult. The specter of the reverse split could weigh on Groupon stock for the foreseeable future. Stocks often initiate reverse splits to appeal to institutional investors who mandate a minimum per-share price.
This does not necessarily prove that Groupon stock cannot someday recover. Booking Holdings (formerly Priceline.com) is an example of a stock that staged a dramatic recovery after a reverse split.
Still, many also remember the reverse split of Helios and Matheson Analytics, which did little to stem its decline. Blue Apron's reverse split failed to the point that the company now wants to go private. The fact that Groupon has now made such a move points to the significant risks surrounding its stock.
As mentioned earlier, Groupon has improved gross profits per share on a customer level. If it can shed its money-losing operations, it might build a path to recovery. However, the massive drop in the stock shows the degree to which investors have lost confidence in Groupon. Until the company can reverse the sequential revenue declines, Groupon stock will likely face further pain.
