BATON ROUGE, La., Dec. 21, 2021 /PRNewswire/ -- Prescience Point Capital Management, a research-focused, catalyst-driven investment firm that seeks to earn superior risk-adjusted returns uncorrelated to the broader market, announced today that it has published a detailed analysis of Groupon, Inc. (Nasdaq: GRPN) ("Groupon" or "the Company") calling shares significantly undervalued with a price target range of $63 to $98, or 2.7x to 4.3x the current share price.
A copy of Prescience Point's research report on Groupon can be found HERE.
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.
"We believe the positive dynamics developing at Groupon have been misunderstood or overlooked by investors and sell-side analysts," said Eiad Asbahi, Founder and Portfolio Manager of Prescience Point. "Over the past eight years, the value of Groupon's stake in SumUp has grown exponentially and by itself today, is worth close to 40% of Groupon's current enterprise value. Additionally, the Company's core business has recently stabilized and, after taking $200m of excess costs out of the business and strengthening its balance sheet, is well-positioned to take advantage of accelerating fundamentals over the coming quarters. We believe shares are worth $63.18 today, and $98.86 in a conservative upside scenario, which would represent a 172.3% to 326.1% premium to the current share price of $23.20."
This material does not constitute an offer to sell or a solicitation of an offer to buy any of the securities described herein in any state to any person. In addition, the discussions and opinions in this press release are for general information only and are not intended to provide investment advice. All statements contained in this press release that are not clearly historical in nature or that necessarily depend on future events are "forward-looking statements," which are not guarantees of future performance or results, and the words "anticipate," "believe," "expect," "potential," "could," "opportunity," "estimate," and similar expressions are generally intended to identify forward-looking statements. The projected results and statements contained in this press release that are not historical facts are based on current expectations, speak only as of the date of this press release and involve risks that may cause the actual results to be materially different. Certain information included in this material is based on data obtained from sources considered to be reliable. No representation is made with respect to the accuracy or completeness of such data, and any analyses provided to assist the recipient of this presentation in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any analyses should also not be viewed as factual and also should not be relied upon as an accurate prediction of future results. All figures are unaudited estimates and subject to revision without notice. Prescience Point disclaims any obligation to update the information herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate.
About Prescience Point Capital Management
Prescience Point Capital Management is a research-focused, catalyst-driven investment firm that seeks to earn superior risk-adjusted returns uncorrelated to the broader market. Unlike traditional investment strategies, we are unconstrained and can opportunistically invest globally, across asset classes, industry verticals and capital structures. Whether investing in misunderstood distressed assets, creating value through shareholder activism, or uncovering fraud, we seek to capitalize on opportunities that others miss or fall outside the rigid mandates of most investment firms.
Our uniqueness resides in our unconventional thinking, deep research, intellectual curiosity and willingness to go against the prevailing wisdom.
The firm was founded by investor Eiad Asbahi in 2009 and is headquartered in Baton Rouge, LA.
For more information please visit www.presciencepoint.com or follow @PresciencePoint.
Prescience Investment Group, LLC is a member of the Financial Industry Regulatory Authority, CRD number 152721.
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