Groupon Traders Capitulate: Now What?
Tuesday, after Groupon (GRPN) - Get Report management reported a $27.6 million loss, a revenue miss, and a not-so-upbeat guidance and a stalled customer base, bulls expecting a continuation of a share-price rebound fell into shock, then panic. More than eight-times the average number of shares exchanged hands during Wednesday's trading. During the pre-market session, Groupon had lost as much as $1.27 (down 31.5% from Tuesday's close), before rallying steadily for the remainder of the day, paring the loss to $1.04 (down just 25.8%) at the close of trading, Wednesday.
Wednesday's price action, which included determined buying -- starting at $2.76, 14 cents above the November 2012 low of $2.62 -- indicates a provisional (possibly permanent) bottom to the stock price had been reached. Expect the oversold rally, which began at 8:45 a.m., to continue to mid-December.
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This expectation comes with years of past experience with trading turnaround companies, whose management's plan for a comeback include the immediate elimination of under-performing operations, a major tweak to the business model, and the introduction of a new and experienced CEO, which in this case is Amazon-bred, Rich Williams, to execute the plan.
These are three characteristics of what I call a "bona fide turnaround play" and they have been met: slash, rethink, and bring in new blood. Therefore, as we move into calendar 2016, Groupon has a good chance for an upside move during the next two quarters, as traders, historically, have shown to bid shares with optimism during a new CEO's "honeymoon" period.
Will Groupon be the next play akin to a Zynga, whose stock rallied to a double before crashing again within the two-quarters honeymoon period after the new CEO ended with failure? Or will Groupon become the next Sirius XM play, a stock that soared and maintained a four-bagger move to those brave enough to catch the falling knife in Oct. 2011?
Regardless of Groupon's long-term proposition, my short-term price target for the company is $3.50-to-$3.60, by mid-December. This target price range was surmised by estimating the upper-band limit to the downward-slopping price-channel that you should expect to be touched within six weeks. Then, expect tax-related selling to commence as we move into mid-December. Down 62% since the start of the calendar year, Groupon will most likely rank close to the top of the tax-conscious trader's sell list of deeply underwater holdings to offset profitable trading elsewhere. Longer-term traders may want to skip the oversold rebound play and wait until December to possibly pick up shares from eager tax-related sellers, who may also be the very same traders who buy back the shares during January (the so-called January effect).
We all know the potential perils of holding Groupon. Downgrades from Wells Fargo, Piper Jaffray and BofA/Merrill Lynch immediately followed Groupon's earnings release. However, the stock price already reflects the uncertainty of the changed course to the company's new online-to-offline real-time marketplace deals, from a previously flawed marketing campaign of daily-deals-in-your-email-box.
The stock price reflects, too, lurking competition from Yelp, GrubHub, eBay, PriceLine Group, and a raft of small competitors, such as LiveDeal, which serve a rather limited market.
The stock's $3 price tag already reflects a fallen confidence in management's string of earnings losses, a wait-and-see return to meaningful revenue growth, and terrible investor sentiment as reflected by the approximately 15% of the company's float positioned short. And, as Macquarie Group analyst Tom White aptly put it during his interview with CNBC: At a $3 share price, "you've got a bit of a buffer" from the downside while you wait for the results of the turnaround attempt.
New-CEO Williams' turnaround effort begins with approximately $965 million in the bank and virtually no debt to speak of. Groupon management intends to increase marketing by between $100 million and $150 million in 2016, and may use some of that near-billion dollars of cash to buy back its own stock if further downside to Groupon were to become disorderly.
Now, with Amazon and Google backing out of its plans to organically grow a place in the O2O market, Groupon's huge footprint in the O2O space just became that more valuable to a suitor, who may very well be Google once again.
Would Google make another offer for Groupon? While the offer of $6 billion by Google to acquire Groupon in 2011 is obviously off the table, with Groupon's market cap of nearly $2 billion, a smaller offer from Google of say, $4 billion, would cash Groupon shareholders out with a quick double. And the deal wouldn't even leave a small dent to Google's $70 billion war chest. Though, that could be a pipe dream for Groupon investors right now.
This article is commentary by an independent contributor. At the time of publication, the author does not hold a position in GRPN but intends to go long after the report is published.