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Why Groupon Is Down

By Chris Hill – Jun 22, 2020 at 11:47AM

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Groupon earnings weren't as bad as investors had feared, but there are other things to watch, too.

In this episode of MarketFoolery, Chris Hill and The Motley Fool's Maria Gallagher go through the latest headlines and earnings from the markets. They discuss the top management change at an online marketplace. There is news about some stock splits, and a sports company has back-to-back stock offerings. They also answer some listeners' questions and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 17, 2020.

Chris Hill: It's Wednesday, June 17. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Maria Gallagher. Thanks for being here.

Maria Gallagher: Thanks for having me.

Hill: We have got the business of sports; we are going to dip into The Fool mailbag, but we're going to start with some earnings. And honestly, this is one of those situations where you put "earnings" in air quotes, because we're talking about Groupon (GRPN 2.23%), and the first-quarter result, they actually weren't as bad as Wall Street was fearing. Groupon still lost a lot of money, and shares are down about 10% today.

Gallagher: Yeah, it was not a great quarter for Groupon. The sales fell 35%. Gross profit was down 34%. They laid off or furloughed about 2,700 employees out of their 6,300 employees. And they also have a new CEO, and a COO left. So, it's been a wild couple of months for Groupon and it hasn't been great.

Hill: Yeah, I'm glad you mentioned the management change, because that was something I, sort of, noticed this morning when I was reading about this quarterly report. And one of the statements was from Interim CEO Aaron Cooper. Aaron Cooper has been at Groupon for a decade or so, but I was like, "Well, wait a minute, what's the interim?" And yeah, as you mentioned, a couple of months [laughs] ago, the board basically said that the COO, the Chief Operating Officer, and the CEO, yeah, you're both out of here.

So, I'm not even sure where the silver lining is right now with Groupon. Because on top of everything else, last week they executed the dreaded reverse stock split. And in this case, it was a 1-for-20 stock split. So, for those unfamiliar, a regular stock split, you know, sometimes companies will come out and say, hey, it's a 2-for-1 split. For every share you own, you're now going to have two, but of course, the price is cut in half. The reverse split is the opposite, because they're trying to boost their stock price, and so they came out and said, for every 20 shares you own, you're going to get 1. So, I mean, the management shakeup, the fact that Aaron Cooper has been there a decade and still has the interim tag on his [laughs] CEO title. I don't know him, but I think I'd be a little miffed if that were the case. You have to wonder what the board is up to there.

And then, you and I were talking about this earlier today, Maria. I mean, we're in the middle of a pandemic, I think of Groupon, I know they have several business lines, but I think of them as more of, like, the experience company. For a long time that's been their marketing. Like, "Hey, go out and take a hot air balloon ride and we're going to get you a discount on that." And that sort of thing. And, again, it's not all of their business, but they really took a hit in this environment.

Gallagher: Yeah, I think that the experience is really where they get their bread and butter, that's what they're known for. They are trying to look -- they break out their revenues in terms of their Local and their Travel revenue. Travel revenue is less than 10%. Local revenue is almost 91% of that revenue, but a good chunk of that Local revenue is Experiences within that Local space. And so, I don't think that that will bounce back anytime soon. I guess the only silver lining would be that as states start reopening, people and companies will be so desperate for anyone to come, they'll have really good deals and they'll try and utilize Groupon and people will try to utilize it if they don't have that steady income that they're used to, but it's still not a great outlook for Groupon.

Hill: Yeah, it's a good point and I think that one of the things they talk about is their active customer base. It'll be interesting to see if they're able to grow that in the next three to six months. I'm wondering, if you think -- I mean, they have, between North America, where they have about 25 million active customers and then international, outside of North American, another 16 million. So, they've got about, you know, 40 million, 42 million active customers.

This is not a big company. The market cap is about $750 million. Do you think someone is going to swoop in and buy Groupon just so they can get that active customer base or do you think that there are still enough question marks that that's not in the cards right now?

Gallagher: I think it would be, kind of, a smart acquisition for some people to get you that bigger customer base and for people to continue to implement deals. Everyone -- I love a good deal, I know a lot of people who love a good deal. So, having those options are pretty smart if you're a big retailer or you want exposure into a growing customer base of people who generally live in cities, like deals, like experiences. I feel like it's pretty smart to grow that customer base if you need to.

Hill: Let's move on to the world of sports, because DraftKings (DKNG 5.00%) is making headlines once again. They announced a secondary stock offering of 33 million shares. And if you're thinking to yourself, "Hey, didn't they just become a public company?" Yes, less than eight weeks [laughs] ago DraftKings entered the public market, but the stock has doubled in just a short amount of time. So, I'm wondering, first and foremost, Maria, do you think this is a smart move by DraftKings?

Gallagher: I actually think it is, their initial offering, like you said, was about $17/share in April. And the secondary offering is now based on over $40 share price. So, I think it's smart to capitalize on the excitement of shareholders at a time where balance sheet stability is something that all investors are looking for, all investors are craving. So, if you can capitalize on that and make your balance sheet a little more stable, I think it's smart to do so. And then the secondary offering is, kind of, in two parts, the part that the company is offering and then the insider selling. And so, if you're an insider who's gained a lot of money in the past eight weeks and you want to cash out on some of those winnings, I don't think that's a bad idea.

Hill: What kind of moat do you think DraftKings has for their business? Because I've heard analysts talk about the casino companies and how the moment they decide to, sort of, essentially build their own version of this, it's going to be lights-out for DraftKings. Do you think they have a moat?

Gallagher: I actually think they do. I think that the first is that they are mobile-first platform. So, their daily fantasy sports platform, people talk about them with sports betting a lot, but I think that having that ingrained into people's daily routine and a way to talk to your friends and they have some of those network effects of being able to talk with their friends throughout the platform. I think that's really smart and that'll be hard for casinos to get that really good mobile platform as well as those network effects.

And they also have this thing called SBTech, which is a company that they acquired right before they went public. And so, they actually also own that underlying technological platform. And so, I think that's another revenue driver for them that people aren't speaking about that much, but I think is a really strong competitive advantage for them actually.

Hill: So, you're not really a big sports fan, but based on what we were talking about earlier today. It sounds like you're actually, even though you're not a big sports fan, you're interested in DraftKings just as entertainment?

Gallagher: Yeah, I think sports betting is kind of fun, I think it's easy to get into when you don't really care about the outcome of the game. It makes you feel a little more connected if you think your friends are really connected and you feel a little out of the loop because you don't care. For me, I think it's kind of fun if the bets are small, if you're betting $1, $5, just a way to make the game a little more exciting, if you generally dread sports games like I might.

Hill: Well, particularly with the, you know, the rise of prop bets, which sometimes are about things that happen on the field, but most famously the Super Bowl, you know, one of the things you can bet on is how long is the national anthem going to be, which to me seems like, if you're ever going to fix, I'm actually listening to -- there's a podcast called American Scandal and one of my college roommates sent me the latest episodes because we went to Boston College and it is about a point-shaving scandal that a few members of the Boston College basketball team were involved in, in the late 1970s. And just listening to how hard it is to, sort of, pull off that type of fixing, one of my thoughts was, "Boy! If only they were trying to do this in the advent of trying to fix the national anthem, because that seems like the easiest thing to fix. You just get whoever is singing it and just be like, 'Look, I need you to stretch this out a few extra seconds.'"

Gallagher: Yeah, that's a good point.

Hill: [laughs] Our email address is [email protected] Question from Marcus Lum. Going outside of the realm of stocks, Marcus asks. "I'm intrigued with how each of the analysts at The Motley Fool started their career and ended up there. Of course, I could do the boring way of LinkedIn stalking, but I'm sure [laughs] each of them has a motivating, inspiring story to tell."

I like that Marcus was just up-front, like, "I thought about stalking all the analysts on LinkedIn, but, nah, I'm not going to do that."

"Some things I'd be interested in knowing in becoming a research analyst, how important is it to have a formal education in finance and how important is it to have a CFA designation?"

We've got people at The Motley Fool who are part of the investing team with you Maria, who I think have a BA in Economics or Finance, that sort of thing. I don't think you're one of them, though.

Gallagher: No, I have a BS in Psychology with a concentration in Applied Behavioral Analysis Therapy. So, I didn't study finance undergrad. I went to a school, also in Boston, called Northeastern, where they do a co-op program, which is basically six-month-long internships. And so, I did two different ones, the first one, I didn't love, and the second one I kind of ended up working at an investing firm up in Boston and I fell in love with investing. I found it really interesting, I found it this really cool way to be like an active participant in the world you live in instead of just being a conscious consumer, being a conscious investor was really exciting for me. But it was right before I graduated college, so I couldn't change my major. I couldn't add a minor and I ended up just trying to do as much as I could to teach myself.

We're lucky that we live in the world of the internet, there are so many classes online. So, I think the question about a formal education, I don't necessarily think you have to, it's obviously great to get a foot in the door to have that education, but if you can prove that you understand it and you're willing to learn, I think that the doors will be open for you, you just kind of have to be a little intrinsically motivated in terms of taking some online classes. I've taken some Coursera classes.

And honestly, every question in the world, I think there is one person on YouTube who has thought of it and has made a 10-minute video to answer that question, because I have found that time and again.

Hill: I will just add parenthetically that Tom and David Gardner, the brothers who started The Motley Fool, along with their friend Erik Rydholm, neither of them studied finance in college, they learned about it from their dad as they've talked about -- but, you know, I think it's an important point you made at the end there, because I think there is probably an extra motivation you need if you're not going the traditional "I'm studying economics," "I'm studying finance" route, because that does probably get you in the door, it doesn't mean you're necessarily going to be successful. I think if you're like, applying for a research analyst job and you've graduated with a History degree or an English degree, something like that, you know, there are some places where they'll just say, no, we don't have time to consider people like that. But you know, if you get yourself in a position where you're able to interview, I think that's your opportunity to, sort of, express why you'd be good as a research analyst.

One thing, you know, and I didn't study finance in college, either, but I've had the chance to speak at different colleges to different finance classes and one of the things I always talk about is, don't forget communication as a skill, because you can master a balance sheet inside and out, you can crunch all the numbers you want, but at the end of the day, if you are a research analyst, you also have to be good at communication. And it's not just going on a podcast of CNBC or [laughs] something like that, like, you have to use communication to convince people of your investing ideas.

Gallagher: Yeah, I think the communication and writing is a really underutilized skill. I think I kind of like that I studied psychology, because people move the markets, so understanding people, I think, is a really kind of unique way to understand and think about the markets. So, I think trying to use your skills to your advantage is really smart. And then the financial skills, really, you can learn it, you just have to be dedicated. So, you will have to study, you're not just going to magically learn it, but you'll study at night and you can figure out if you really want to.

Hill: Maria Gallagher, thanks for being here.

Gallagher: Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, and we'll see you tomorrow.

Chris Hill has no position in any of the stocks mentioned. Maria Gallagher has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Groupon, Inc. Stock Quote
Groupon, Inc.
$9.19 (2.23%) $0.20
DraftKings Inc. Stock Quote
DraftKings Inc.
$15.32 (5.00%) $0.73

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