Back in November of last year I told InvestorPlace readers that Groupon (GRPN) stock was a “must buy.”
That looked like bad advice up until a couple days ago, but after gains of 83% over the last three sessions by Tuesday’s close, that advice looks golden.
And with Groupon producing a strong quarter under new leadership, the merger appeal of GRPN will make that November call look even better.
What’s Moving Groupon Stock?
The big gains in Groupon stock came in response to two catalysts: The first was fourth-quarter earnings; the second was a disclosed investment from Alibaba (BABA).
Groupon’s Q4 was by no means a complete success, but strong North American billings (accounting for more than 61% of its total and rising 10.7% year-over-year) gave hope to investors that there is a place in the e-commerce marketplace for GRPN.
Ironically, I predicted this improved performance behind the leadership, goals and strategy of CEO Rich Williams. What makes Q4 perhaps most impressive is that it is William’s first full quarter as CEO.
Given this improved operating performance, Alibaba’s 5.6% stake in GRPN was the icing on the cake to turn sentiment from bearish to bullish.
That said, Alibaba is a company with a history of making small investments all around the world, a fact that many have pointed to as a way to devalue its investment in GRPN.
More Room to Run for GRPN
Seeing as how I predicted late last year that BABA and Amazon (AMZN) would ultimately battle for Groupon, I don’t think the investment is insignificant at all.
Even after GRPN stock’s big move, it trades at just 10 times last year’s free cash flow minus cash and equivalents. At that price, Groupon stock is incredibly cheap, especially when you consider its growth in North America.
All things considered, BABA has already made the initial move, but don’t be surprised if the company comes up with $5 billion and buys all of GRPN. The fact that all Groupon markets outside North America saw a double-digit decline in billings is irrelevant. Alibaba cares mostly about the U.S. business, as it gives BABA something that it does not have and which it can ultimately grow much larger.
I think it is a very likely scenario that BABA buys all of Groupon, and obviously the market agrees. Groupon’s value, North American growth, active user base of nearly 50 million and niche service for local e-commerce still make Groupon stock an appealing buyout option for just about any retail company, whether it is Amazon or Walmart (WMT).
So if you bought GRPN stock over the last couple days, hold tight and avoid taking profits as an acquisition is very possible.
But even if a buyout never comes, there’s a lot of room for Groupon stock (still down 50% over the past year) to soar higher.
As of this writing, Brian Nichols was long GRPN, AMZN and BABA stock.
