Why the heck did the stock of Groupon (GRPN) fall so much yesterday? How could a stock go down more than 20% on slightly better than expected EBITDA and revenues?
How can the market not like that the company bought Living Social, a competitor where it can now pick and close, meaning pick what office of Living Social is doing better or worse than one of its own and close it or fund it more aggressively, depending upon the stats?
Usually when I interview a CEO and his or her stock is down, it's pretty darned obvious -- and often painful -- why, because there are no free passes. But I spent hours trying to figure out what Rich Williams had done wrong to merit such a drastic decline in value, one that cut the company down to where its cash is, more than a third of its capitalization. The answer?
It had run too much.
I think the company is simply going back to its roots as a local coupon business. Nothing sexy, but something worth more than $2.3 billion if it gets it right. That's, of course, the real question: can it get it right? From the very beginning, Groupon never had to worry about getting it right, because it was all about the buzz. Sure, it made some money for a couple of years, but nothing worth the company's price tag.
Now it's pretty much the only game in town, even as people keep presuming that a company like Action Alerts PLUS charity portfolio holding Google (GOOGL) or Growth Seeker portfolio name Amazon (AMZN) is going to come after it. I can tell you that this is a retail business, and the margins are never going to be good enough for the behemoths to challenge Groupon.
So what's the point of owning it? I think that if you are the only digital coupon game in town and you can use algorithmic pricing and machine learning to anticipate behavior, you can make a ton of money for your clients. That's exactly what I think that Groupon can do.
To me Groupon is a useful, focused business without a lot of growth, which can make enough money that its market cap shouldn't be so close to its cash position.
But to do that the CEO, Williams, had to dismantle a huge amount of infrastructure that was created to mask declines in couponing or to put money to work that was burning a hole in the pockets of the old managers.
I got interested in Groupon and said it was too late to sell it after putting a hate on this monster forever when it sold a company called Breadcrumb, which is a restaurant point-of-sale system, back in May for an undisclosed sum. We use Breadcrumb at Bar San Miguel to keep a running total about how we are doing each night. I was fascinated by how good it was and how it enabled me to keep track of receipts and get a sense of things going awry that I otherwise might not know about.
I got interested because it made no sense for Groupon to own Breadcrumb. Sure, someone could say "let's cross-promote this point of sale system with digital coupons", but the fact is that small business people aren't going to make those kinds of connections. The register is different from the coupon. They have nothing to do with each other.
So when Williams sold it, I knew this company had gotten serious about profitability, just like it had when it decided to close underperforming offices around the globe.
Ever since then, it's been a terrific performer -- until yesterday. To me, this company's going to turn out to be a digital dominator of a niche market, local coupons, a business that can make a lot of money or be swallowed by another company that says "this one's making too much money, let's buy it with the cash it has on the balance sheet."
That means, to me, snap this stock up on the weakness. This management team is focused. The decline is undeserved.