After a 50% rally off the March bottom, we believe Groupon’s stock (NASDAQ: GRPN) seems to still have room to grow based on its valuation. Groupon’s stock has rallied from $12 to $19 off the recent bottom compared to the S&P which moved 35%. The primary reason for the high recovery was the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments.
Groupon’s stock has partially reached the level it was at before the drop in February and March due to the coronavirus outbreak becoming a pandemic. In reality, demand and revenues will likely be lower than last year, despite which we believe the stock could see an potential upside post coronavirus crisis.
The company lost 82% of its share price since the end of 2017, and some of this drop over the last 2 years was fueled by the 22% fall seen in Groupon’s revenues from 2017 to 2019, and its profits fell from from $14 million in 2017 to $-22 million in 2019.
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The company has seen a steady revenue fall over recent years, and so has its P/S multiple. A key factor behind the trend is the change in its net income margin figure from 1% to -0.5% over the last two years, with the figure likely to recover in the current year once clarity on the Covid outbreak emerges. Our dashboard ‘What Factors Drove -81% Change In Groupon Stock Between 2017 And Now?‘ has the underlying numbers.
Groupon’s P/S multiple changed from 1x in 2017 to 0.6x in 2019. While the company’s P/S is now 0.2x there is a possible upside when the current P/S is compared to levels seen in recemt years. P/S of 0.7x end of 2019 and 0.6x as late as 2018.
Effect of Coronavirus
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to the stay-at-home orders there is reduced discretionary spending which has adversely affected consumption as consumers focus on essentials. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe Groupon’s Q2 results in will confirm the hit to its revenue.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.
While Groupon’s stock has upside potential, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.