Last month, research firm UBS downgraded shares of Groupon Inc (GRPN) to a “Sell” because of a $3.20 price target. That represents a bleak outlook with analyst Eric Sheridan believing that Alphabet Inc (GOOG, GOOGL) and Facebook Inc (FB) will become much bigger problems for Groupon stock than the market expects.
While Sheridan is most likely correct, with both his price target and the reason why GRPN will eventually fall, there are two wild cards that could take Groupon stock in a completely different direction, involving Amazon.com, Inc. (AMZN) or Alibaba Group Holding Ltd (BABA).
Groupon created a reputation as the internet’s No. 1 spot for online coupons, but with that business fading fast, it reinvented itself to target local e-commerce. The problem is that tech juggernauts like Alphabet and Facebook have entered the space to capitalize on a fast-growing ad business that will reach $60 billion in value by 2020, according to UBS.
Naturally, if companies like Alphabet and Facebook enter the local market, it takes opportunity away from GRPN. In fact, UBS expands on this notion, saying that GRPN lacks a large mobile user presence, does not benefit from scale advantages and has not shown product innovation like Facebook and Alphabet.
Hence, Groupon will not win this war for market share in the local arena, which means its stock will eventually suffer.
Albeit, there is no question that UBS is right about GRPN. Fact is that Groupon is having a hard enough time growing revenue without increased competition from GOOGL and FB, among others. The fact that so many big tech companies are penetrating its industry is not good for the company or Groupon stock.
GRPN Has a Wildcard
Groupon stock has had a nice run this year, but even in the most favorable of scenarios GRPN is fairly valued. Thus, there is very little additional upside from this point forward, and Groupon stock is likely to face increased selling pressure as new competitors ramp spending in the local industry. There are, however, two wildcards for Groupon stock.
The wildcards: Whether GRPN can form meaningful partnerships or be acquired by either AMZN or BABA.
Last year I predicted that both AMZN and BABA would end up fighting for GRPN in 2016. This came well ahead of Groupon stock’s recent run when it was still trading near 52-week lows. While this prediction has yet to play out, it’s worth noting that BABA did in fact purchase a 5.6% stake in Groupon back in February.
This shows that BABA is in fact interested in GRPN, and given how quickly Zulily was acquired following Alibaba’s similar investment, there’s a good chance that BABA’s move to invest in Groupon will accelerate the interest in GRPN by other parties, even if it is just a defensive play. Nevertheless, Groupon stock cannot thrive by itself, but the company still has a significant presence in local e-commerce, travel and online coupons.
These are industries and a presence that would be very appealing for a company like BABA, which is trying to make an entrance into the U.S. Furthermore, if the other wildcard — AMZN — acquires GRPN, it could add an additional layer to Amazon’s business, while also preventing an easy entrance into the U.S. for BABA. For that reason alone, GRPN is attractive for AMZN.
Buy Groupon Stock?
The bottom line is that UBS is right about the outlook for Groupon stock and its outlook. It does not look good ahead if GRPN is a standalone company.
However, if GRPN is paired with a juggernaut like AMZN or BABA, then both FB and Alphabet’s entrance into the space become much more difficult. In other words, the investment appeal for Groupon stock centers around mergers and acquisitions, but without that, there are not too many reasons to own the stock.
Therefore, investors must consider this fact, and consider the risks tied to M&A. Given those risks, I would not own Groupon stock, not unless it falls significantly lower in the coming months.
As of this writing, Brian Nichols was long Alibaba.
