Groupon Earnings: Supply/Demand Sides of Its Platform Weaken Further

The probability of Groupon GRPN creating a network effect continues to decline, as demonstrated by lower usage, user monetization, and merchants or the supply side. Under the leadership of interim CEO Dusan Senkypl, the firm’s focus remains on increasing the supply or merchants on the platform, but from a different angle, which we believe may show results next year. Groupon is aiming to become a marketing partner with merchants by providing options in terms of products and offering placements at varying take-rates for different types of campaigns—from customer retention and increasing customer frequency to quick and more direct-response customer acquisitions. While we do not expect merchants to be significantly attracted to the platform we also don’t expect the partnerships to create any switching costs; we are assuming some improvement and an overall increase in the number of merchants and the level at which they participate on the platform.

We have only modestly adjusted our model and are maintaining our $19 fair value estimate for Groupon. The stock is still trading at a discount to the valuation of its 2.29% stake in SumUp. According to PitchBook, SumUp’s most recent funding round last year would value Groupon’s stake at around $6 per share. However, Groupon has stated that the investment could be worth only $120 million, or merely $4 per share, which we expect is due to current private and public market environments.

On the liquidity front, Groupon had a $163.7 million cash balance, which included $47.7 million drawn on the $75 million revolver. Its $230 million convertible notes will mature in March 2026. With cost savings from the restructuring and seasonality of its working capital, the firm could generate free cash flow in the second half of this year. If necessary, Groupon could also sell its stake in SumUp and other assets. Management remains confident that it can meet its obligations this year.