Groupon Inc. | GRPN

Prescience Point believes Groupon is a misunderstood Company that has been wrongly left for dead due to an antiquated bear thesis and apathetic sell-side.  Market participants have completely overlooked the sizable value of Groupon’s investment in SumUp, a fast-growing fintech with a 50%+ revenue CAGR, which we believe is worth at least $268m (and growing) or close to 40% of Groupon’s current enterprise value.  The market is also significantly undervaluing Groupon’s core business, whose recent turnaround has been overshadowed by pandemic related shutdowns and a recent change in revenue recognition accounting that makes it look like revenue got cut in half.  We believe shares are worth 2.7x to 4.3x the current share price.

Prescience Point’s optimistic view of Groupon is based on a number of factors, including:

• Groupon’s sizable stake in SumUp, which we estimate has grown to at least $268m or close to 40% of Groupon’s current enterprise value. In 2013, Groupon made a small initial investment in SumUp, a fast-growing fintech with a +50% revenue CAGR. Today, GRPN’s investment is worth at least $268 million, yet it’s been largely overlooked by market participants.  Even after a recent ~$90 million book value mark-up of the investment, sell-side analysts covering Groupon have continued to overlook its existence.
• Factoring in the SumUp investment, the market is valuing Groupon’s core business at just 4.4x consensus FY 22 EBITDA. After deducting the value of the SumUp investment, which we estimate to be worth at least $268m, from the current enterprise value, we calculate that the market is valuing the Company’s core business at just 2.9x FY 22 EBITDA. This valuation represents a massive 66% discount to the Company’s historical average multiple of 8.7x forward year EBITDA.  At this extremely cheap valuation, very little has to go right in order for Groupon shares to increase substantially from current price levels.
  
• Despite the severe headwinds created by the global pandemic, Groupon’s business has stabilized. Bears have continued to posit that Groupon is a melting ice cube, while completely ignoring recent evidence that shows otherwise.  The pandemic hit Groupon with a vicious one-two punch of behavior modification and labor shortages which gutted demand and supply in key verticals.  However, the worst is over for customer attrition as the North America customer base has bottomed and International customers approach trough levels, and Groupon’s customer base is now concentrated with its most loyal and profitable users.  Notably, the largest and most profitable sub-category, Local, is already seeing sequential growth in users and accelerating purchase frequency.
• Recent, large decline in revenue is largely attributable to a change in revenue recognition accounting . Historically, the Company’s Goods business accounted for ~50% of total revenue.  In early 2020, Groupon began to transition its Goods business to a third-party model.  Accordingly, Goods revenue began to be recognized on a net basis (previously gross).  The North America first party Goods business transition was largely completed in Q4 20, while International will be completed by the end of FY 21.  At first glance it appears revenue has fallen off a cliff and will never recover.  However, this is largely attributable to this revenue recognition change.  Consequently, Groupon likely falls through the cracks of many financial statement screens as prospective investors inaccurately conclude that Groupon’s business is in steep decline.
• With minimal leverage and the leanest cost structure in its history, Groupon is well-positioned to take advantage of accelerating fundamentals. Groupon focused on liquidity at the expense of growth throughout the pandemic, stripping out >$200 million of fixed costs while simultaneously strengthening its balance sheet.  The time for conservatism is over and we fully expect the Company to deploy significant capital over the coming quarters in the pursuit of long-term sustainable growth.
• Minimal sell-side coverage and high short interest shows just how misunderstood and ignored Groupon is. Three years ago, nine analysts joined the earnings calls, today there are two. Even with the stock near all-time lows, short interest is still relatively high in the mid-teens as bears have failed to re-evaluate their antiquated short thesis given price confirmation and negligible bullish sentiment.

Prescience Point projects that, with a return to a more normalized operating environment, Groupon could achieve FY 2023 adjusted EBITDA of $286.6 million. Using a conservative multiple of 6.0x adjusted EBITDA (above current levels, yet well below the Company’s historical average), and factoring in the value of Groupon’s stake in SumUp, Prescience Point has set a target price for Groupon’s shares of $63.18. A more bullish case, assuming FY 2023 adjusted EBITDA of $340.9 million and an 8.0x multiple (in-line with historical levels), results in a target price of $98.86.