Amazon and Alibaba Will Fight for This Prize in 2016

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Groupon (GRPN) has been nothing short of a bloodbath since its 2011 IPO, with shares down 90% since that initial public offering.

What started as an online coupon company transitioned to “local” e-commerce and ultimately into online travel. And the fact is that despite several management shakeups, GRPN stock has struggled on a quarter-to-quarter basis.

But despite evident problems for Groupon stock, this is still a company with $3.2 billion in 12-month revenue and a niche market in local e-commerce. For that reason, don’t be surprised if the depressed value for GRPN stock attracts the likes of Alibaba (BABA) and Amazon.com (AMZN) sogroupon stock grpnoner rather than later as both look to expand their online businesses.

How GRPN adds value to Amazon

When it comes to e-commerce in the U.S., Amazon.com can pretty much penetrate any segment that it desires, with ease. Most recently, Amazon.com launched a Handmade arm to compete with Etsy (ETSY), a marketplace that allows vendors to sell handmade and craft goods to consumers. While Amazon.com’s Handmade site probably won’t make too big of a difference for its stock price, it’s the point that Amazon.com has the capabilities to stop all e-commerce competitors in their tracks that makes this meaningful.

With that said, Groupon’s business model remains unique. Yes, it is e-commerce, but GRPN is the first and only company to really build a brand around local commerce. It sells products that AMZN does not, like massage packages, photography, daycare, etc., products and services that would be very difficult to incorporate with AMZN’s core product offerings.

While GRPN’s overall revenue declined 5.7% year-over-year during its last quarter, its e-commerce business, Groupon Goods, grew 8% to $411.6 million. This business, along with GRPN’s Travel initiatives would add value to AMZN’s business, and provide it with something the company does not currently offer in the e-commerce arena.

Why BABA would want Groupon

Albeit, even if AMZN does not view GRPN as valuable, it may still acquire the company as a defensive play against BABA. After all, the last thing AMZN wants is for BABA to make a meaningful move in the U.S. e-commerce industry.

While Alibaba is not exactly well-known here in the U.S. among consumers, it is an absolute e-commerce juggernaut. During its last quarter, BABA created $112 billion in gross merchandise volume in China alone, and is quickly moving into other regions of the globe.

Prior to Liberty Interactive’s $2.4 billion purchase of Zulily, BABA had bought 10% of Zulily to create its most meaningful asset in the U.S. Zulily was a flash-selling site mostly aimed at women and children. It would seem that GRPN’s local appeal would be a good fit for BABA to build its presence in the U.S., and of course, it is GRPN stock price that makes all this possible, if not likely.

Who ultimately gets GRPN?

The bottom line is that GRPN is unique in the e-commerce industry, and with a market capitalization of just $1.7 billion the price is right for one of these giant e-commerce companies to make the purchase.

Furthermore, GRPN has $963.5 million in cash & equivalents on its balance sheet. If you remove that cash from GRPN stock value, and incorporate the company’s near $228 million in free cash flow the last four quarters, then GRPN stock trades at less than 4x FCF. Therefore, GRPN’s valuation is just as meaningful as its business to why AMZN and BABA could pursue an acquisition.

That said, the chances of AMZN buying GRPN are very good, but the most likely scenario is that BABA makes the move. Historically, AMZN is not a very acquisitive company, and prefers to organically add new segments to its business to grow. Meanwhile, BABA has been one of the most active companies in the world at mergers, acquisitions, and partnerships since its IPO. GRPN represents a great opportunity for BABA to penetrate the U.S., something that’s very likely in 2016, and could ultimately cause problems for an overvalued Amazon stock.

Brian Nichols owns shares of Groupon and Alibaba stock.


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/groupon-grpn-stock-amazon-alibaba/.

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