Groupon’s Suffering From Demand and Supply Weakness Continues

Groupon’s GRPN task of creating a network effect on its platform is becoming more difficult as both the demand and supply sides continue to weaken, demonstrated by the firm’s fourth-quarter results. While management’s latest strategy is to focus on increasing inventory and targeting mainly large merchants, the firm will be facing higher acquisition costs. As Groupon continues its restructuring, which is simply cost cutting, we think the demand side of Groupon’s network could weaken further. We have lowered our top- and bottom-line projections resulting in a $19 fair value estimate, down from $27. While the stock is trading at a significant discount to our fair value estimate, our Uncertainty Rating remains Very High. We expect volatility to continue until the firm’s active customers and monetization stabilize or begin to strengthen, which we are assuming will take place in 2025. The stock is also trading at more than a 30% discount to the valuation of the firm’s 2.3% stake in SumUp, which, based on data from PitchBook, we still estimate to be around $6 per share.

Fourth-quarter revenue declined 34% from last year to $148 million, driven by a 32% decline in North America and a 37.5% decline (29.9% on a constant currency basis) in international revenue. While goods revenue continued to fall as the transition to a third-party marketplace in the international segment is ongoing, local revenue in North American and international markets declined 30.8% and 28.8% (20.1% on a constant currency basis), respectively. Weakness in demand was displayed by a 19% lower customer count and lower purchase frequency, down 10% year-over-year, faster than third quarter’s 7% decline, although up 19% sequentially (mainly due to the holiday season). The firm generated an operating loss of $32.8 million compared with last year’s $2.3 million operating income, mainly due to the significant decline in revenue and some restructuring and asset-impairment costs.