KEY POINTS

• GRPN operating business extremely undervalued
  • Ex-SumUp investment, core biz trading at Fwd P/E 1.5x
• Key inflection point in 1Q22 as crisis era restructuring complete
• Strong EPS Growth '22 leveraged to reopening, significant FCF growth expected
• Analyst Upside 67% despite currently poor sentiment
• ~20% SI, reversal will pressure short cover scramble in current market environment
• Next ER is Feb 28 (AMC)

Company Description

Groupon operates an online marketplace for deals on local goods, services, travel, and attractions. Revenue is driven by commissions from sellers, with 60% of gross sales coming from North America. The company also has substantial holdings in equity investments, with their SumUp (fintech) assets estimated at approx $500m alone (current GRPN mkt cap ~$640m). The company brought on the former Zappos CEO as a permanent CEO in 4Q21, replacing the interim CEO.

Thesis

GRPN shares are severely undervalued, especially when accounting for equity investments in Sum-Up (valued at approx $18/GRPN). Ex-investments, GRPN's operating business is currently valued at a Fwd P/E 1.55, Fwd PEG of 0.038, and Fwd P/S of 0.12; in its entirety (inc. investments), GRPN is valued at Fwd P/E 10.9, Fwd PEG 0.267, and Fwd P/S of 0.68, still insanely good. For comparison, Peabody Energy (ticker BTU, a US coal company) currently trades at a Fwd P/E of 6.36 and Fwd P/S of 0.54. Fundamentally, this company screens extremely well.

Like many companies, GRPN initiated a strategy shift and cost restructuring starting in 2020 (with related impairments occurring through 4Q21) that is finally nearing an inflection point for their business rebound. Despite impairments ending in 2021, the company is expected to continue realizing an additional $225m in cost savings in 2022. Coincidentally, this is also occurring as covid restrictions are easing. Both the restructuring and the “post-covid normalization” are intersecting at the perfect moment to supercharge the company's profitability as Americans return to activities outside the home and merchants return to the platform.

Additionally, they revised their accounting methods in 2020 to better account for their goods strategy which has been a drag on revenue comps in 2021, but will normalize in 2022 as it laps quarters since the change was implemented.

In Q3, the company also entered new partnerships with Google Pay and Square for distribution of inventory, a major win in increasing their audience that will help drive increasing volume.

The company just brought on a new CEO, Kedar Deshpande (former CEO of Zappos), and it's possible that he resets financials. However, I'd assign a low probability to this given that financials have already been reset over the restructuring period.

It's also worth noting that GRPN has a strong record of surpassing analyst estimates over the covid period, and as long as analysts stay cautiously optimistic, they're likely set up to continue leaping over the low bar. Given how depressed estimates are, this may allow them to overcome a key risk that earnings may be volatile following the Omicron surge in Dec-Jan in the US, though this may be neutralized by guidance commentary as the surge is a month behind us and there is likely more clarity on the road ahead.

There is also a high short interest on GRPN stock (~19% of float) that has lazily remained in the stock as a short momentum play. Given this type of inflection point for the underlying business combined with the current market environment leading HFs to crowd into shorts, a strong rally on GRPN fundamentals from here would likely lead to an acceleration of short covering, driving the stock closer to fair value in a relatively short amount of time.

Tldr: GRPN severely undervalued, has a ton of hidden value from investments, and is at a key inflection point exiting a restructuring at the same time that demand should flow back to the platform. Sentiment is still cautious enough to create a phenomenal entry point, while short interest is extremely high, creating a potential short cover as lazy momentum shorts unwind.

Current Valuation & Financials

Fwd P/S ’22: 0.67

Revenue Growth Est: 0% '22, 7% '23

• Revenue is expected to stabilize in 2022, though I suspect this is a great setup for continued upside surprises, boosted by the Things to Do and Beauty Goods verticals that are leveraged to easing covid restrictions.

Fwd P/E 10.9

EPS Growth Est: +41% '22

• EPS expected to inflect higher as cost restructuring gains take hold and revenue stabilizes & accelerates as the world reopens post-covid and merchants return to the platform.

Fwd EV/EBITDA: 3.05

EBITDA Growth Est: 27% '22, 13% '23

• Strong EBITDA growth a direct result of cost restructuring and continued cost improvements. GRPN has used the pandemic crisis to shift strategies and drastically improve efficiency of operations and profitability.

Free Cash Flow Generation: +140% YoY '22

• FCF is expected to turn positive in '22 for the first time since 2019. GRPN currently trades at a 12% Fwd FCF Yield, very high for a growth stock inflecting to reaccelerate revenues. 4Q21 FCF is expected to grow at 290% YoY, with 1Q22 expected to be the first decisively positive FCF Q1 ever.

Equity Investments

• Equity investments are the 1000lb elephant in the room. The latest earnings report revalued LT investments at $123m on the balance sheet, though in Jan 2022, it was reported that SumUp (of which GRPN own's 2.4%) was preparing to raise an funding round at a $22bil valuation. If successful at this valuation, their equity position in Sumup would equate to approx 528m, increasing their investments by over 4x. In turn, their balance sheet equity would actually equate to a higher total value than their current market cap.

Analyst Price Target: $37, +67.6% upside

• Analysts have gone stale, with 60% of PTs updated prior to 2022. By leaving GRPN in the cold on updates to institutional investors, this has created opportunities once the company reports on Feb 28 for models to be revised higher and sell-side sentiment to suddenly become more optimistic given the current inflection point.
  • Barclays stated valuation is currently “rock bottom” and expects the marketing strategy to generate growth near term, though is waiting for confirmation of continued momentum before upgrading the stock from underweight.
  • JPMorgan is also cautiously optimistic that the 2020-21 restructuring efforts are about to pay off through higher growth and a more profitable business.
  • A recent report by Prescience Point Capital Mgmt established a longer-term fair value range of $69-100+ when accounting for the operating business and investments.

How to Play

All positions provide the highest aggregate returns at the lowest strike price in their tenor. Returns presented as profit (i.e. 2x = 200% profit, 300% original cost). Recent highs of $31 on 2/1/22; 2H21 high of $45.

• Stock! No brainer. Big returns to be had for the swing trade.
• Quasi-Risk Averse: Jul '22 C22. On a run to 35, these return 2x; continued momentum above 40 returns at least 3x.
• Pump It Up!: Apr '22 C25. Offers profit of 1.8x-7.5x on a run to $30 or a break toward $40.
• WSB Delight: Mar '22 C25. Offers profit of 3x-7x on run to $30 or a break toward $35.