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Groupon Stock Down 50%: Buying Opportunity or Time to Run?

By Andrés Cardenal – Sep 15, 2015 at 11:00AM

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There is a lot of uncertainty surrounding Groupon lately, however, uncertainty can be a source of opportunity for contrarian investors.

Source: Groupon.

Groupon (GRPN 5.69%) stock has delivered dismal returns for investors lately. Shares of the online deals company are down by nearly 50% from their highs of the last year, trading around historical lows in the neighborhood of $4.2 per share. Things don't look any better from a long-term perspective. Back in 2011, Groupon was making record highs at around $26 per share, and this was shortly after the IPO, when investors' expectations for the company were much rosier.

Investors in Groupon have seen their capital decimated over the years, and there is a lot of negativity surrounding the company right now. The short interest ratio, meaning investors who are betting that Groupon will continue declining, is at a staggering 14.5% of the shares in circulation.

The company is facing serious challenges, and Groupon's future looks quite uncertain at this stage. On the other hand, uncertainty can many times create compelling opportunities for contrarian investors. Is the massive decline in Groupon stock a buying opportunity, or should investors stay away from the company until things turn for the better?

Groupon offers a new deal
Groupon is in the midst of a transformation, the company is moving away from its daily deal email roots toward a predominantly mobile, local commerce marketplace. Management wants customers to go to Groupon searching for opportunities, an approach the company refers to as the "pull" business model, as opposed to the old "push" method of trying to lure customers with big discounts via email.

The new strategy is focused on areas such as local services, particularly in categories such as food and drink, health and beauty, and leisure activities. These are mostly high-frequency, local-use services, where management intends to position Groupon as a daily habit for customers.

The company has also recently expanded into online food ordering and delivery via the acquisition of OrderUp, an online and mobile food ordering and delivery marketplace operating in nearly 40 markets across the United States. Management calculates that the potential market opportunity in the business is worth around $70 billion, and the acquisition makes sense from a strategic point of view.

OrderUp could provide Groupon with valuable operational experience and industry know-how, and it sounds like a natural extension to Groupon's renewed focus on local services. On the other hand, competition is remarkably tough in the space, and there is generally not much room for profitability when everyone is trying to increase its share of the pie.

Investors are not buying
While many of the company's initiatives seem well intended, the cold, hard fact is that Groupon is not gaining much traction among consumers, and financial performance remains disappointing.

Revenue during the second quarter of 2015 grew only 3% globally, reaching $738.4 million. Currency headwinds were a major drag during the period, since sales excluding the impact from currency fluctuations grew by a much stronger 11%. Still, this is hardly enough for a company operating in such a dynamic industry, and needing to prove to investors that it has what it takes to deliver sustainable growth over the coming years.

The key operating metrics are nothing to brag about. Global units, meaning vouchers and products sold before cancellations and refunds, increased 7% year over year to 53 million in the second quarter 2015. North America units increased 9%, EMEA units grew 10%, and units in the rest of world declined by 3%.

Active customers, or customers that have purchased a voucher or product within the last 12 months, grew 6% year over year, to $48.6 million as of June 30, 2015. Average customer spending is declining; during the 12-month period ended in the second quarter of 2015, Groupon registered an average spend of $133 per customer, versus $136 per customer in the same period last year.

Even worse, guidance for the third quarter of 2015 was well below expectations. Groupon is forecasting revenue to be in the range of $700 million to $750 million, substantially below the $756 million analysts were expecting on average. This does not speak well about the main business trends and management's confidence in the chances for a sustained turnaround in the middle term.

At these prices, there is a lot of negativity incorporated into Groupon, and the stock offers a lot of room for gains if the company can jump-start growth. However, management has not proven to have a viable and sustainable strategy to turn things around. Until, or unless, the company can show clear improvements, I would stay away from Groupon stock.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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