On 1/17 we went Long of GRPN with part of our bull thesis being the company’s stake in the European payments company SumUp. Today it was reported by Bloomberg that SumUp was pursuing a 20bn Euro valuation in its latest funding round. That would be $22.5bn. We don’t know GRPN’s exact stake. What we do know is that a) the original stake was 10.3%, b) the company participated in some future funding rounds likely to offset dilution, c) then in January 2020 is sold half of its position, and therefore d) GRPN’s stake is likely in the 5% range today. The SumUp valuation headline at a 5% stake, combined with net cash at the end of the quarter would suggest at GRPN stock price of $41.71 vs today’s closing price of $26.68. This is a targeted valuation for the funding round and a value for a GRPN liquidity event might be lower, but even still we’re probably looking at a valuation that implies the actual Groupon operations are valued at zero or negative, and we think there is bull case on the core operations as well. On this news we’re taking GRPN higher on our Long list, despite today’s 20% rip in the stock.
Below is our original long thesis and math on the valuation with some sensitivities around SumUp stake and valuation.
From 1/17/22
GRPN (Groupon) – New Long Idea. Adding GRPN Long Side. This stock resembles our call on GME in late 2020. A recognizable consumer brand, yet it's a company that has been left for dead due to the consensus secular view of the business being a melting ice cube. Valuation is near trough at 3.5x EBITDA, while short interest is relatively high at 13%, and we see some potential catalysts to accelerate the business in 2022. The core digital coupon business of GRPN has been under pressure over the last decade as the proliferation of retail ecommerce and apps has taken coupons more "DTC". However, we think the value proposition for the consumer and marketing opportunity for local businesses still makes a ton of sense. If GRPN was going to die, the pandemic should have been the straw that broke the camel's back. Instead, it appears GPRN has seen a bottoming in North American active customer count around 15mm at the same time the pandemic has hit the reset button on local businesses from both a supply and demand side. On the continued consumer 'reopening' and new business turnover, there will be new opportunities for marketing to new customers and Groupon is a powerful tool for that. The company also used the pandemic as an opportunity to change the business structure and reduced headcount to be less prone to demand volatility. Recent revenue trends are optically overly negative due to a change in structure of the company's Goods business from an owned to a 3p model, perhaps making for overly negative sentiment. The company has a new high quality CEO as of a month ago in Kedar Deshpande who spent 10 years at Zappos including being the CEO over the last year after the passing of Tony Hsieh. We suspect Deshpande makes this move knowing there is big potential with Groupon. Lastly, the company has an equity investment in SumUp, the European payments solution provider that is similar to Square. It disclosed a material gain in 4Q 2019 related to an observable price change in this investment. SumUp is a high growth payments company, and though we don’t know exactly its stake in SumUp GRPN's 10-Q suggests the equity stake in SumUp is in the area of 25% of the current EV of GRPN, which appears conservative. When we sum up (pun intended) these points, it checks a lot of boxes for a company about to unlock significant equity value. We've still got some incremental research to do, but if we're right on the business trajectory we think this is a 1 year double and potential 4 bagger over 3 years. The Macro Quad setup and near term Omicron risk are keeping us cautious on the timing of a high conviction call as well, but we could easily see this as a best idea within 3-6 months if we get conviction in the business acceleration.
