A MarketWatch article by Barry Randall, founder and Chief Investment Officer at Crabtree Asset Management, on the 26th of June, makes the case for investing in Groupon.
Randall stated that he was very surprised in late May when the systems they run to analyze the markets came up with Groupon stocks as having a good investment potential.
This, in the face of the dubious record that has surrounded Groupon in the past, came as somewhat of a shock to Randall. As a result, he listed some of the company’s questionable past actions.
The founders and early shareholders extracted $1 billion from the company before its IPO, considerably weakening the balance sheet at the expense of private shareholders.
The initial prospectus included unorthodox accounting practices that masked some of its losses. The SEC asked them to remove this non-GAAP measurement, a request that the company complied with.
The severe criticism the company took prior to the 2011 $20 per share IPO, including accusations of being a “Ponzi” scheme. This resulted in Groupon trying to bypass SEC rules and issuing a public statement rebutting the accusations. This was in breach of the rule that no statements can be made by the company in the period prior to the IPO.
The stock peaked at $31.14 on the first day before plummeting to a low of $3.63 at the end of its first trading year.
A company where the founding CEO, Andrew Mason seemed to impose his own personality on Groupon, defining it as a quirky, humorous company. He proved totally unsuitable to lead a public company and was eventually forced to resign.
Despite all the early setbacks and questions the company faced, the finances as well as the business model seem to be stabilizing. Capital expenditure, which had exploded from a 2009 figure of $290,000 to $43.8 million in 2011, seems to have leveled off at the $80 to $90 million range annually.
Revenue growth has also settled down to a small 3% after a crazy 200%+ figure in 2010. Analyst consensus seems to be that growth will be flat for 2015 following the sale of a controlling interest in Ticket Monster. The expected revenue growth for 2016 is around the 10% level which Randall feels is realistic.
Cash flows are positive and have grown steadily despite a small blip in 2012 and 2013, but this rebounded in 2014 to $288.8 million, approaching the $290.4 million peak of 2011. The free cash flow figure of $171 million in 2012 increased to $201 million for 2014 to achieve a very acceptable FCF margin of 6.3%.
The very important repurchase of shares announced by the company in order to reduce the excessive and worrying number of shares available can easily be financed out of the free cash flow figure.
Another worrying aspect of Groupon is the high executive turnover with the recent announcement that CFO Jason Child will be departing. Despite the staff turnover problem, Groupon still seems to own about 60% of the daily-deals market, claiming $6 out of every $10 spent by purchasers of advertised daily deal offers with a duration of 24 to 36 hours.
Randall highly recommends Groupon as a buy with the stock trading at a price/sales ratio of only 1.2 and with the expanding cash flow, it looks like a safe buy. Despite this, readers should be aware of all the facts before making any investment decisions.
MT4 Chart: Groupon