After scuttling across the ocean floor with share prices well below $5 since last July, Groupon Inc (GRPN) seems to have finally caught a line.
In February, Chinese online retailer Alibaba Group Holding Ltd (BABA) disclosed that it acquired a 5.6% stake in GRPN, yanking the stock from the depths to soar 30% in one session, then another 40% in the next.
With BABA now hovering over its shoulder and whispers of a buyout circulating Wall Street, has GRPN’s future suddenly become a little brighter?
Open Sesame on GRPN Stock?
A deal between Alibaba and Groupon seems like a natural fit. A lot of what Alibaba already does is the kind of creative retail negotiation that GRPN was initially built on — bulk discounts and “make an offer” transactions that may feel alien to Western consumers trained to buy at sticker price.
BABA has always been more like a juggernaut eBay Inc (EBAY) than a tidy web store like Amazon.com, Inc. (AMZN). Having GRPN as an established U.S. outlet for that model of commerce just makes sense in terms of BABA’s international expansion.
But GRPN is a decent toehold for anyone based purely on its organic site traffic. The company still reaches about 20 million shoppers a month, which pales in comparison to eBay’s 50 million, but it’s not a bad reach. The only question is how much that audience is worth.
EBay scores around $55 in revenue and $3 in profit per active user each month. By that metric, GRPN should be booking $13 billion a year on the top line and $1.22 a share in annual profit. But those aren’t GRPN’s numbers. The company has struggled throughout its lifetime to book more than a fleeting quarterly gain, and Wall Street is convinced the present business model has basically hit a wall at $3 billion a year in sales.
Right now, investors are playing 0.75 times sales for a business that has lost $600 million since going public back in 2011. Unfortunately, GRPN has never even come close to earning back its $13 billion IPO market cap, which was based on hyper-growth hopes that never panned out.
Bottom Line on Groupon Stock
Still, it’s clear that BABA executive chairman Jack Ma covets the Western reach Groupon can give him. BABA has $18 billion in cash, so Ma can buy GRPN outright any time he wants — but he hasn’t.
Instead, BABA has been nibbling shares on the dips, signaling that there could a larger relationship here if GRPN management wants to explore something strategic.
At this point, it could be GRPN management’s only option, because while BABA was buying shares, other institutions were happy to unload. Big funds like Vanguard and Fidelity have already left GRPN in the dust, and it doesn’t look as though anyone else will be making an offer to buy either.
AMZN just pulled the plug on its daily deals site, Amazon Local, and already has more retail traffic than anyone else anyway.
Alphabet Inc. (GOOG, GOOGL) certainly doesn’t want it — it dodged a bullet when GRPN refused a $6 billion buyout in 2010 and have been patting themselves on the back ever since. So unless another company speaks up, Groupon is worth whatever Alibaba will pay, on BABA’s terms.
From a pure short-term trading perspective, getting BABA in the picture does create a base for the share price. But GRPN has been running on fumes for a while, coasting on existing sales and just barely absorbing its losses.
The only reason it hasn’t been wiped out entirely is that nothing disruptive has come along to replace it. Yet.
With strategic options running scant, all the company can do is continue to survive and hope BABA reaches out a hand.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.