- Groupon's e-mail/push marketing is less effective due to spam filtering in e-mail clients.
- Groupon's management team focuses on short-term value creation, which diminishes long-term growth assumption, and reduces confidence in the company's strategic positioning.
- Competition in the e-commerce space has stiffened and has put Groupon in a position where it will be difficult to grow.
- Groupon isn't cheap enough to attract legitimate value investors.
- Overall, investors should avoid Groupon.
Groupon (NASDAQ:GRPN) has experienced a bit of a rally in the past couple days, but I honestly believe that investors would be very poorly positioned to own the stock given the deceleration in audience metrics, and the inability to increase take rates on any transactions via its daily deal site.
Note: You might be interested in my earlier Groupon Stock Valuation Video.
Groupon’s strategy of sending out daily emails on deals has proven to be ineffective over time, as email service providers are screening for spam, and in the case of Gmail, Groupon e-mails are sent immediately to the promotions tab, which is another way of saying, the “spam folder.” The average email user does not pay any attention to the spam folder, and while Gmail is not the only email client provider, Gmail holds 16% email client market share according to Litmus email analytics. Therefore, strategically Groupon is poorly positioned. Furthermore, broader industry trends have shown that email will become less effective at sustaining ongoing relationships with customers.
Therefore, Groupon’s strategy to combat this was to transition the website so that it had pull, rather than push marketing. Initially the active user growth on the application was strong, which correspondingly drove a lot of speculation around the Groupon stock. However, efforts pertaining to mobile are starting to slow based on recent statistics. Furthermore, the company’s board and executive team have demonstrated a track record of short-term decision-making.
Note: You might be interested in Groupon Stock Analysis video evaluating the company's fundamentals.
The recent sale of Ticket Monster to KKR (a well reputed private equity firm) indicates that the management team is also very ineffective at identifying divestitures that offer meaningful shareholder value. The reason why I state this is because the counterparty is KKR, which is known to generate absolutely phenomenal returns whenever they engage in any transaction. In other words, a transaction with KKR is like shaking hands with the devil. Groupon decided to sell 46% of its stake for $360 million, and of that amount $300 million was spent on share buybacks. The incremental cash generated from the transaction added some value over the short term, but over the long run, the equity stake in Ticket Monster could have immensely increased in value. Hence, Groupon’s board is the type of counterparty Wall Street-minded dealmakers love. Groupon's management is motivated by short-term greed and sells promising assets prior to the full realization of intrinsic value.
Engagement metrics have also been very underwhelming. The active customers figure is relatively small at 49 million, and has grown 6% year-over-year in the most recent quarter. This is more of a niche market, and broader adoption seems to have hit a ceiling. Efforts to improve the growth rate involved transitioning Groupon into the mobile app store, and raising awareness of the app via advertising. These efforts make sense, but it hasn't resonated with the mass market. Groupon’s daily deals won't appeal to every consumer, which also limits the market size.
Amazon transitioned to mobile much more quickly and more effectively than Groupon, and also offers a daily deal site in a very familiar format.
Also, if you recently shopped on Amazon, and were looking for a very specific product, Amazon will usually wait until the price drops, and then send an e-mail or app notification notifying you of the price reduction. This strategy is very similar to Groupon but is packaged into the shopping experience that the broader market seems to like. Also, Amazon is a stronger platform for e-commerce in general, as it has a healthy ecosystem of 3rd party sellers when compared to Groupon. Therefore, while Groupon is a solid product, it isn’t positioned well enough to compete with larger scale e-commerce platforms.
So, the competitive threats, deceleration of growth, and short-term decision making of the management team are the three reasons why investors should avoid Groupon stock. Not to mention it trades at 5.6 times tangible book value, which doesn’t make it a compelling investment for value-oriented investors either. So, if the Groupon stock is cheap relative to its prior valuation, it’s not cheap enough for deep value investors yet.
Furthermore, the market is pricing in assumption on anemic growth, which will reduce any long-term upside for the foreseeable three-year period. Sure, the company has time to improve some of its metrics, but from what I have seen, the management team is also very incompetent at holding onto strategic business units too.
So, with those factors in mind, I would avoid Groupon stock.