Groupon shares continue to plunge. They hit a new low for the year Tuesday, touching $2.65. This is the lowest they’ve been since 2012, when shares briefly got this low before quadrupling. 2013’s recovery has faded though, with shares giving back all of the recovery. So, what’s wrong with Groupon?
The answer is fairly simple. The turnaround strategy that had been underway earlier in 2015 was a flop.
Groupon fired roughly 1,000 employees, and the idea was supposed to be that the company could maintain its revenues while cutting costs down. Instead, revenues fell further than expenditures were reduced, in fact causing a net loss in their position.
There were various facets of poor performance that caused the disappointment. The company struggled to acquire new shoppers to their marketplace during the quarter. Whether this was the fault of Groupon or broader consumer behavior is hard to say. Amazon.com recently dropped its Daily Deals service, making one wonder if the concept’s best days have passed.
The doubts regarding the speed of the company’s expansion seem to have been justified. It is indeed hard to enter dozens of markets in various countries, particularly when you’re also firing employees.
The company’s plan going forward appears to be more of the same. They brought in a new CEO, which is something, but the central strategy remains seemingly unaltered.
Groupon hinted that they’ll be firing even more employees, streamlining their international operations, and continuing the thus-far ineffectual share buyback.
The company’s best asset going forward is its sizable cash pile. The company has a billion dollars on hand, and nearly half its market cap is net cash. So the company has plenty of time to try and figure out a new and better business strategy. Can they pivot from Daily Deals, which seem to be fading, into segments like groceries that are faring better?
And while they have plenty of cash, the underlying business appears to be deteriorating in a hurry. The company’s guidance for the all important holiday season was extremely soft.
Groupon now expects to merely break even for the Christmas quarter. Retailers are supposed to be highly profitable during this time of year to cover costs during the slower spring and fall months. But Groupon is no longer significantly profitable during any stretch of the year.
In the third quarter, the company didn’t just put up lackluster earnings. No, it hit a worse point. The company failed to even generate positive operating cash flow. Even before making investments in new operations, accounting for depreciation, and other such charges, the company’s core business failed to bring in any bucks.
Groupon shares are still priced as though the company were growing and at least mildly profitable. The company’s book value is only $1/share. Excluding the company’s cash, Groupon has virtually no other assets of significant value.
It’s clear what’s wrong with Groupon stock. There’s simply no reason for investors to buy now at anywhere near this price point. The company has already told you this upcoming holiday season is going to stink. Then you’ve got to sit through a traditionally soft Q1 before getting a chance for a really solid earnings surprise. Dead money while you wait.
Plus with the management shakeup, who knows if the new leadership will be able to turn the company around. Groupon has lacked in decisive leadership. Instead of changing up the business strategy or making a bold acquisition, the plan just seems to be firing employees and buying back stock.
Those may be right actions, but they aren’t the sort of spark that can reverse the company’s slide. The company needs more revenues, and to get those, it needs to overhaul its outlook. Until that happens, this stock isn’t going much higher.