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Shares of Groupon (GRPN) are up 62% overall in 2023, but it's the stock's more recent momentum that's really eye-popping. GRPN has more than tripled in value over the last six months - nearly quadrupled, in fact - up 297% over this time frame to value the company at a market cap of $417 million.
Despite these outsized gains, GRPN is trading 97% below its all-time highs, and has burned massive investor wealth over the long term.
As the stock roars higher off its lows, let’s see if it makes sense to buy Groupon stock today.
Behind Groupon's Business Model
Founded in 2008, Groupon is an online marketplace that connects consumers and businesses. Consumers can access the marketplace either by a mobile app or the company’s website. Groupon primarily operates in three categories that include local, goods, and travel. It aims to grow sales by building long-term relationships with local merchants and widen its inventory selection by enhancing the customer experience through inventory curation. This, in turn, results in higher customer demand and purchase frequency.
Groupon generates sales from the net commissions earned by selling goods or services on behalf of third-party merchants. Its revenue is reported on a net basis, which is calculated as the difference between the purchase price collected from customers and that paid to the merchant. Additionally, it earns a fee when customers make purchases with retailers using Groupon’s digital coupons.
Groupon has worked with more than a million merchants to date, generating over $25 billion for businesses by selling more than 1 billion coupons. It has saved over $35 billion for consumers and is the leader in a highly fragmented market valued at $1 trillion. With over 17 million active customers globally, Groupon platforms attract around 80 million visitor sessions each month.
In the last 12 months, its total billings stood at $1.7 billion, allowing the company to rake in $543 million in sales. However, due to Groupon’s exit from several international markets in recent years, its sales have fallen from $2.2 billion in 2019.
GRPN Cuts Costs
Similar to several other companies, Groupon has focused on lowering its cost base to defend against an uncertain economic environment. In August 2022, Groupon initiated a multi-phase cost savings program to reduce its expense structure. This includes reducing its employee count by 1,000 positions, driving operating expenses significantly lower.
Those cost savings initiatives enabled Groupon to reduce operating expenses by 5% quarter-over-quarter to $96 million in Q2. Comparatively, it reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $15 million, compared to an EBITDA loss of $5 million in the year-ago period. Groupon also ended the June quarter with a free cash outflow of $45 million, which was 48% lower than the prior-year quarter.
However, a reduction in its employee base means Groupon will end 2023 with revenue of $511 million, a decline of almost 15% compared to the year-ago period. Comparatively, adjusted loss per share is forecast to narrow to $2.09 in 2023 from $2.99 in 2022.
What is the Target Price for Groupon Stock?
According to a report from Seeking Alpha, Windward Management LP has increased its stake in Groupon to 8.6%. Groupon is now the investment management firm’s largest holding, having increased its total investment in the online platform by 34% in 2023.
According to Windward Management, GRPN is grossly undervalued and might touch $55 by the end of 2024, indicating an upside potential of 300% from current levels. Windward Management emphasized Groupon should record an adjusted EBITDA of at least $200 million in 2025. If it's valued at 10x EBITDA, GRPN be valued at $2 billion in the next two years.
However, Wall Street generally has less upbeat projections for Groupon. Out of the three analysts covering the stock, one has a “moderate buy” rating, and two recommend a “strong sell.” The average target price for GRPN stock is $8.33, which is 40% below the current trading price.
While the stock's massive breakout rally is intriguing, GRPN remains a high-risk bet, given it has to deliver on its lofty goals and turn consistently profitable. For investors looking to buy equities on the dip, there are several other stocks available to buy at depressed multiples that offer a much better risk-reward profile than Groupon.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
