Groupon Inc (NASDAQ:GRPN) was once the poster child of the Web 2.0 age, pulling off a 2011 stock offering that was the biggest IPO for a U.S. Internet company since Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). And for a brief moment, GRPN stock seemed like the future of the tech sector.
Of course, the wheels came off stock soon after, with an accounting scandal and restated earnings that gutted shares; Groupon stock briefly traded around $26 in late 2011 after its IPO, but crashed to about $4 a share in just 12 months.
Groupon has tried to rebuild itself through fits and starts, however, including by ousting founder and CEO Andrew Mason in 2013. And lately, investors seem to be coming around to the short-term potential of GRPN stock given that it has nearly doubled from its February lows.
But is that move just another head fake for a stock that will remain choppy for some time, or is it a sign of true stability and growth for the embattled online couponing and e-commerce company?
The Case for GRPN Stock
One of the biggest bull cases for Groupon stock in recent years has been the idea of an acquisition, either from Google or Facebook Inc (NASDAQ:FB) or some other digital advertising powerhouse.
And that hope seems closer to reality now that Alibaba Group Holding Ltd (NYSE:BABA) has disclosed a significant stake in GRPN stock and could be testing the waters for a full-fledged Groupon buyout.
It’s not just the acquisition play, either, that is encouraging for investors. Q4 earnings showed strong North American billings that rose 11% year-over-year to the company’s largest recorded figure, driven in large part by e-commerce from shopping via its Groupon Goods arm instead of services and couponing.
The icing on the cake is that even after this run, Groupon is trading for a pretty significant discount to revenue, with a market capitalization of just under $2.3 billion but projected sales this year of about $3 billion. Considering many tech stocks trade at huge premiums to sales, that’s noteworthy.
Even the short sellers who have been picking at Groupon’s carcass regularly over the past few years have gotten the message that things are looking up, with short interest dropping to the lowest level since October — even as daily trading volume has surged.
When you add up buyout interest, valuation and sentiment, things look pretty good for Groupon.
The Case Against GRPN Stock
Of course, it’s not all coming up roses for GRPN stock right now. The fact remains that the company isn’t predicted to post an annual profit this fiscal year, and a lot can go wrong in the coming months to ensure 2017 isn’t profitable, either.
Furthermore, while some segments are seeing decent growth, the company as a whole is set to see revenue that is flat at best in fiscal 2016. That’s very disappointing for a company that is relatively young and valued at just over $2 billion with plenty of potential share to gain.
And most damning, investors need to ask themselves why any of the bigger names in tech — including Google at home and Alibaba abroad — would ever consider buying out every share of GRPN stock for a few billion dollars considering the company’s latest “innovation” is old news. Turning to third-party fulfillment and e-commerce is a clear imitation of Amazon.com, Inc. (NASDAQ:AMZN), and it’s difficult to believe that Groupon has figured out something that these massive tech companies haven’t or can’t uncover on their own.
When you throw in the fact that investors with a history of getting burned will have little patience for a Groupon stock decline, it’s very hard to trust this rally.
Given these competing interests, then, the most likely scenario seems that both the bears and bulls may be right. GRPN undoubtedly has momentum now, and should continue to outperform in the coming months … but it is very hard to believe that this company is going anywhere long-term.
So enjoy the ride while it lasts, and make sure you don’t get greedy if you own GRPN stock.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
