I am not a big fan of Groupon (NASDAQ: GRPN). Not the service, nor the company, and especially not the stock.
Here are the three biggest reasons why I'm staying away from the online coupon wrangler and its toxic shares.
1. This business model makes no sense
Groupon connects consumers with various types of retail businesses, like any good advertising or marketing service would. So far, so good.
But the company faces a few impossible business puzzles.
In order to attract customers, Groupon must come up with decent discount pricing on its coupon deals. At the same time, asking for too much of a price cut drives the coupon-issuing clients to other marketing services. And somewhere along the line, Groupon itself would like to take a cut of the reduced revenue represented by its coupons.
Look, Groupon is obviously not the first company ever to walk this thin line between price-sensitive consumers and sales-hungry business clients. It's just that the company doesn't have much to offer on either side of that delicate balance, beyond what you'd find in the coupon insert of your local newspaper. It just happens to be done on a computer or your phone.
Coupon-clipping is not an attractive sector to work in, and Groupon is hardly a dominant leader in that crowded space. The novelty act of online deal-making is wearing thin already, which brings us straight to the second reason why you should sell Groupon right now.
2. Stalled sales, plunging profits
This is one of those times when a couple of pictures really do speak volumes:
In less than three years, Groupon has turned modest GAAP earnings and downright healthy free cash flows into seas of red ink. Meanwhile, see if you can spot the revenue trend here:
Annual sales increased by roughly 40% between 2012 and 2015, but haven't moved a muscle in two years. The old rocket ship appears to be out of high-octane fuel.
3. Shaky balance sheet
When cash flows run red, you need a solid balance sheet to lean on until the turnaround effort starts to work. That's not the case for Groupon.
Two years ago, the company had $1.1 billion of cash on hand and no debt at all. When cash reserves started to run low, Groupon issued $250 million of convertible senior notes. But that didn't stop the bleeding, and the company's cash balance has dwindled to $691 million as of the latest quarterly report. That's balanced against $182 million of effective long-term debt, leaving little financial flexibility for dramatic turnaround experiments.
That's not working. Groupon will soon need to raise more cash, either by issuing more shares or by sinking deeper into debt. Ideally, the company would fix this by generating positive cash flows, but that solution doesn't seem to be in the cards.
The final tally
Here we have a former high-growth Street darling attempting a turnaround story based on smoke and mirrors. Top-line sales are not growing anymore, bottom-line profits are falling through the floor, and the balance sheet is in rough shape to begin with. You won't find me considering a Groupon investment until the company comes up with a brand-new business model -- and even then, it's never easy to start from scratch.
So if you own Groupon today, I would suggest taking a long, hard look at your investment thesis. You will probably find that there's no good reason to own this stock anymore.
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