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Is Groupon Stock a Buy?

By Rick Munarriz – Aug 18, 2020 at 11:05AM

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The online seller of prepaid vouchers for local experiences is on the comeback trail. Let's see if you should come back, too -- as an investor.

They say that a reverse stock split is often the kiss of death, but Groupon (GRPN 5.41%) is having a pretty sweet afterlife. The local experience discounter has seen its stock move higher since its first day of trading after executing a 1-for-20 split two months ago. Groupon stock has risen nearly 150% since bottoming out in mid-March. 

Groupon still has a long way to go to regain its initial Wall Street buzz. This will be the fourth year in a row of declining revenue. There's also no shortage of skeptics shaking their heads at the rally. Short interest is at a four-year high. However, there's still a lot to like in this potential turnaround story. Let's size up the good and the bad to see if Groupon stock is worth adding to your portfolio. 

Nine TV screens spelling out Groupon at its corporate office reception desk.

Image source: Groupon.

Vouching for prepaid vouchers 

Groupons were all the rage a decade ago. The model -- with Groupon selling prepaid vouchers for local restaurants, merchants, and a wide range of service providers -- made sense. Business owners were willing to take a quarter on the dollar in exchange for offering half-off deals through the platform. It was a way to generate leads with no upfront costs despite giving up so much of the initial sale. 

Groupon would go on to make a big push for international expansion. It eventually broadened its offerings to include actual discounted merchandise, a move that pumped up revenue at the expense of margin contraction. It acquired smaller rivals. It's been peeling back some of those add-ons as it gets back to its original stateside business. 

Today's Groupon isn't perfect, but it also happens to be built for the new normal. Groupon put out one of the more surprising beats of the summer's earnings season. Revenue for the second quarter may have declined 26% to hit $395.6 million, but that was actually nearly double the $200.5 million that analysts were modeling. Groupon's adjusted loss of $0.93 a share was also just a third of the red ink that Wall Street pros were modeling. 

The pandemic has closed many businesses and gnawed away at consumer demand, but Groupon is emerging as a winner on both fronts. Cash-strapped enterprises need to get leads without shelling out upfront capital for marketing. Consumers months deep in a widening recession are seeking out bargains when they do open up their pocketbooks. 

Groupon executive Aaron Cooper stepped in as interim CEO in late March, just as the country's financial markets were cratering. Groupon stock was facing exchange delisting after breaking below the buck mark, leading to the reverse split in early June. However, Groupon's business is holding up better than anyone expected right now. It's also gnawing away at its overhead. By the the time it completes a painful multiphase and multiyear restructuring process it will have shaved $225 million in annualized fixed costs from its model. 

There aren't too many companies that execute a reverse stock split and live to tell the tale, but Groupon is shaping up to be one of them. With the stock still a shell of what it was at its prime -- Groupon stock is trading 96% below its peak shortly after its 2011 IPO on a split-adjusted basis -- there's still plenty of upside left despite the bounce in recent months. Groupon stock is a buy here.

Rick Munarriz 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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