After failing to become a major shopping service, Groupon (GRPN) decided to close its goods division and pivot to the local experiences market, where the company believes it has more opportunities to create value. By being a marketplace for local experiences, Groupon thinks that it will be able to reinvent itself and return to profitability after years of sales decline. The problem with this plan is that the local experiences market relies on people connecting with each other, and it’s unlikely that Groupon will be able to get people to share experiences in the midst of a pandemic. Since the majority of its users are from North America, which is the epicenter of COVID-19 in the world right now, we don’t see how the company will benefit from fully pivoting to the local experience market.
With a fully drawn credit facility and a history of failing on numerous projects, we believe that investing in Groupon is a risky endeavor with a high chance of getting a negative outcome. Not only did the company not provide its full-year guidance, but it also decided not to hold a conference call at the end of Q1, which is a red flag for us. Since it’s unlikely that Groupon will receive any financial benefit from the current restructuring this year, we believe that the company is uninvestable at this stage.
More Uncertainty Ahead
The biggest advantage of Groupon is that it generates leads for businesses and receives a commission for it. By offering cheap deals on its platform, it’s able to attract a high number of consumers that are likely going to purchase products and services of various sellers that are present on Groupon’s platform. However, after deciding to become a shopping service itself, Groupon struggled to gain market share from companies like Amazon (AMZN), and its sales quickly deteriorated. Last year, the company even failed to meet its EBITDA guidance for the year, and its stock depreciated by more than 75%.
In its latest earnings
Source: Capital IQ
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Groupon quickly realized that it needed a change and recently announced that it’ll close its goods business and pivot to the local experiences market. By doing so, the company will lose nearly half of its revenues that were coming from the goods business, and there’s no guarantee that its new business plan will create value. While in 2019 a total of $3.4 billion were spent on Groupon’s platform on local experiences, such as sports events, concerts, massages, etc., the company still doesn’t have an edge in the industry. By having TripAdvisor (TRIP), Airbnb (AIRB), and others as competitors, Groupon needs to improve its user interface and user experience if it wants to compete for market share. Right now, the goal of the company is to improve its booking process by giving its customers the ability to make reservations with one click only like it’s on Airbnb. Other than that, Groupon didn’t provide any additional information about its strategy.
Another problem is that Groupon says that local experiences are a $1 trillion market. However, in its earnings slides, the company doesn’t cite the source for that number and only shows the market share of its peers based on their earnings reports, which is way below $1 trillion (Source: Latest earnings presentation, Slide 7). Even if that number is true, it’s hard for us to imagine how a company with less than $1 billion in market cap will be able to gain a substantial market share without spending lots of resources to compete in such a highly lucrative market.
At the same time, we don’t think that changing a business model, which relies on a constant connection between humans in the midst of a pandemic, is a wise thing to do. Since the majority of its customers are from North America, which is currently the epicenter of COVID-19 in the world, it makes no sense for the company to expand its local experiences offering, especially with the fully drawn credit revolver. It’s unlikely that Groupon will gain any financial benefit from such a restructuring this year, and there’s a high chance that its net loss will widen as a result of this decision.
There’s also no guarantee that Groupon will succeed by pivoting to local experiences. A few years ago, the company purchased Korean startup Ticket Monster but later sold it, as it didn’t know what to do with it. It also used lots of resources to aggressively expand in India, but later decided to exit the Indian market and focus on growth back at home. Groupon failed to create value in the goods business, and there’s a possibility that it’ll fail to gain market share in the local experiences market too. Considering its poor performance in the past, we believe that the company is uninvestable even at the current price.
With liquidity of $767 million and $514 million in debt, it’s unlikely that Groupon will be able to aggressively expand in the local experiences market. After announcing poor results in Q1, company management didn’t even hold a conference call and didn’t share its strategic vision with the rest of the world. By not providing any guidance for the year ahead and not communicating with analysts through a conference call, it’s hard to even understand in which direction the company is moving. While Groupon will hold a conference call next week after announcing its Q2 results and will provide more details about its plans, we are likely going to remain convinced that more value will be lost in the next year as a result of its move to pivot to the local experiences market. Since the Street expects Groupon to be unprofitable at least for the next few years, we believe that it’s better to avoid the stock.
Source: Seeking Alpha
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.