Why Groupon Stock Is Skyrocketing After The Latest Earnings Call?

  • Groupon reported Q4 results that were better than projected but not groundbreaking.
  • Even though the results seemed modest, Groupon stock took off higher.
  • Groupon stock price rose as the market realized the steep discount the stock has been trading at rather than strong Q4 results.

Groupon (NASDAQ:GRPN) is an interesting stock. When Groupon went through a growth phase they drew a lot of investor attention, and then something went terribly wrong in 2015 – their growth halted. And to add salt to the wound, the company lost ground on their operating margin which turned negative. This all had a meaningful impact on Groupon stock, which tumbled almost 63% in 2015. And when the New Year began, 2016 looked like it could be even worse for Groupon as the stock tumbled another 27% until they released their Q4 earnings. On the surface the Q4 earnings report was good, but not great, and certainly not one which would lead to an 80% run-up in the stock price, but it did.

GRPN stock chart

Source: Groupon stock price chart by amigobulls.com

Revenue for Q4 2015 was $917.2 million, a 4% YoY increase. However, Groupon had seen revenue declines in the 3 prior quarters and finished 2015 with revenue of $3.12 billion, which was a decline of 2% from 2014. That 2% drop in revenue is actually quite a changing point as 2014 had revenue up 24% from the prior year. So, as Groupon's growth reversed and operating income worsened prior to Q4 results, investors became worried about the effects it will have on shareholder value and thus cashed out, leading to a huge drop in Groupon stock price. This trend in the stock price was then reversed following Groupon's Q4 earnings report. Groupon stock is skyrocketing following the latest earnings call. So what exactly is the stock worth? Should you buy into this rally? Let’s take a deeper look at Groupon’s intrinsic value to help answer these questions.

Also read: Groupon Stock Seems Undervalued In Light Of Conservative Guidance

Groupon Stock Intrinsic Value

At $3.78 per share, Groupon is trading at 0.7 price-to-sales ratio and a 4.7 price-to-book ratio. While the sales ratio is low, the book ratio has actually crept up due to the company’s declining book value. Below is a DCF I did for Groupon using an 11% discount rate. The model assumes a flat 1% growth rate across the board with improving operating margins.

grpn-dcf

As you can see, based on my projection of discounted future cash flows, I have Groupon’s enterprise value at almost $2 billion. But the interesting part is valuing the equity. Looking at Groupon’s balance sheet they have cash of $853 million and debt of about $123 million, which leaves a negative net debt of $730 million. Subtracting that would bring the equity value to $2.7 billion, which is 22% more than its current valuation.

The DCF makes the assumption that Groupon’s business will continue to move forward at a growth rate of 1%, which may seem conservative but may also be inaccurate as 2015 was a year of negative growth. There is a strong possibility that 2016 can be another year of negative growth shedding about 2% off the company’s topline. Nevertheless, I believe the 1% YoY growth and as terminal growth rate is still fair for valuation purposes. The real shift to stronger cash flows is in their operating margin which is scaled up to 13% in the model. While Groupon’s operating margin may increase at a slower rate they could also surpass 13% and hit closer to the industry average of 20%, which would have a much more significant impact on their free cash flow.

Conclusion

Groupon’s Q4 earnings may have been the catalyst to move their stock price, but it wasn’t the reason. Their Q4 results weren’t good enough to change the market’s perception of Groupon, but rather just good enough to make the market realize that the stock has been significantly undervalued. Groupon’s last balance sheet had cash and cash equivalents of nearly a billion dollars and the stock was trading at a market cap of around $1.3 billion prior to Q4 earnings release. When a company has that much cash and such little debt, it suggests a deep value investment opportunity. Following Groupon’s decent Q4 results investors were exposed to the market inefficiency behind the company’s valuation and drove it up quickly. I believe Groupon stock is now trading closer to a fair valuation with still some upside left. However, it was not due to a great fourth quarter but because investors came to the realization that the company had been trading at a steep discount prior to the Q4 results announcement.

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Comments on this article and GRPN stock

user profile picture
harshal.patel.1
bearish
Seriously? Do you even follow GroupOn?

The stock took off because AliBaba made a large purchase of existing shares; they now own 5%+ of GroupOn.

Your entire article could be replaced by: "GroupOn Rose Due to Alibaba Investment."
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user profile picture
CelestialMR
neutral
After disclosure of their position it helped take the stock off on the second wave following earnings, but it wasn't due to just that. Groupon was trading only a little bit above their cash and cash equivalents going into Q4 earnings. There is no question investors saw the deep value play in the stock and I think that became realized right after earnings.
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