Whether you’re an investor or a consumer, Groupon Inc (NASDAQ:GRPN) is not a name likely to induce strong or even mild excitement.
The once-household service, known for its coupons and discount offers, has had a few rough years – its 2023 revenue plunged to a mere fifth of 2019 levels, the client base shrank, and the stock price plummeted.
However, those closely following the markets may have spotted GRPN’s remarkable 60% climb over the past several days.
A closer look would reveal a much deeper and more interesting story behind the recent gains.
Heading for Disaster
Dire, if not hopeless, is a word that well describes Groupon’s situation through much of COVID and early into 2023.
The company’s revenue had been shrinking for 8 years straight, its cash reserves quickly evaporating, and with some major debt maturities on the horizon - $225M in 2026 alone – GRPN looked set for a quick and sad end.
Major investors agreed with the assessment – the stock has seen steadily high levels of short interest, between 15-25%, as the market prepared to capitalize on a seemingly inevitable bankruptcy filing.
Activists Step In
Not all big players agreed that GPRN’s end is near and certain.
Pale Fire Capital, one of leading activist investment funds in Czech Republic, believed the company misfortunes came down to two key factors: a bloated and inefficient capital structure (fixable by better management), and a prolonged unfavorable macro backdrop (fixable as COVID abated).
The fund wasn’t just making assumptions – in prior years it had successfully turned around Slevomat, “the Groupon” of Czech and Slovak markets.
Pale Fire began accumulating a stake in GRPN in 2021. By early 2023 it was the biggest shareholders, took control of the board, and installed its CIO Dysan Senkypl, the very man who oversaw the turnaround of Slevomat, as Groupon’s new CEO. Pale Fire now holds an over 25% stake.
In August 2023, it was joined by Windward, a Florida-based activist fund run by Marc Chalfin, who bought 8.9% of shares.
The Turnaround Plan
Groupon “is a high quality business with high margins and negative working capital, when run efficiently,” writes Windward’s head in a letter published alongside his stake disclosure.
Activists’ arguments are simple – when well-managed, Groupon is a sustainable business, not one headed for a bust. With a favorable macro tailwind – it’s a growth story, and a great investment opportunity.
Proving the first point, the new management has just delivered what may be considered a first “major win” – Groupon’s Q1 revenue grew YoY for the first time in 8 years.
Simultaneously, the company’s expenses have seen such a cut, that it’s now showing 2019-levels of positive EBITDA, while doing a quarter of the revenue.
Moreover, its cash position now allows GRPN to comfortably cover the $225M of debt maturities coming due in 2026.
On the second point, the investors believe Groupon may be finally entering the environment where it thrives.
As the consumer market is struggling and companies seek to offload inventory, it’s only fair to expect them to turn to coupons and discounts.
What’s Next
If activists are right in their predictions – Groupon may be headed for a “perfect storm,” and enter a highly favorable macro dynamic with its most efficient capital structure yet.
New management is not focused solely on cost-cutting. The company recently announced it’s about to launch a new website and a new app, in a bid to reinvigorate user acquisition.
New teams are laser focused on matching supply and demand across markets, giving users what, when, and where they want, avoiding prior inventory situation of “selling parkas in Miami in the summer and bathing suits in Buffalo in the winter,” as Windward’s letter put it.
Speaking exclusively to Investing.com, Marc Chalfin of Windward said he sees the sum of those factors driving a return to double-digit revenue growth by late 2024 – early 2025.
He noted one other non-obvious growth alley – the launch of a “Gifts” section, something current management successfully implemented at Slevomat. The “Czech Groupon” grew gifts to nearly half of its revenue – at “the Groupon” it’s currently nearly zero.
Chalfin also believes the company should have an easier time offloading some of its assets, namely a 2.3% stake in SumUp – a move pursued since last year. The potentially $100M-$200M sale should be easier to facilitate now, given rumors the fintech startup may be pursuing an IPO.
Both Windward and Pale Fire expect the management to use any excess cash, such as may come from the SumUp disposition, for share buybacks – a buyback of $100M by the end of 2024 is not out of question, Marc Chalfin told Investing.com.
Lastly, given the recent price advancements, it appears likely GPRN’s current market cap will allow it to re-join the Russell 2000 index – meaning a 2.5M-3M share buy on index rebalancing, in Chalfin’s estimate.
Valuation and Targets
According to Windward, similar businesses trade at 10-12-15 times EBITDA.
“If the company were to return to just 50% of 2019 levels, they would generate 200M+ of EBITDA,” implying a market cap of ~$2B, and a share price of around $55, or more than triple from current levels, even after recent share gains.
Windward enjoys an around $11/sh cost average on its position. Nonetheless, during our conversation, Marc Chaflin reiterated that he’s a “long-term investor,” with no intention to sell until the thesis plays out.
Pale Fire’s average is closer to $20.
New CEO Dysan Senkypl joined for a relatively small salary of $150K/year, and a Performance Share Units (PSUs) award package, contingent on GRPN’s share performance. His PSUs vest at 25% increments when stock price clear roughly $15, $20, $31 and $69, meaning he too needs to see the shares at least double before the majority of his compensation kicks in.
Bottom Line
Between improving fundamentals, strong oversight by activist investors, and a well-aligned cost and incentive structures for management and major shareholders, there’s a lot to like about Groupon.
The positive market reaction of the past few days only proves that point.
Will Groupon become Wall Street’s next big turnaround story? Only time will tell.