I have not hidden the fact that I think Groupon Inc (GRPN) stock was just one in a string of internet IPOs that I believe would normally be headed for the trash bin of market history. However, the difference between this batch of profitless internet companies and those of the dot-com bubble in 1999 is that some of this batch have business models that might actually be sustainable.
Might.
Consequently, while I think most of these stocks — like Yelp Inc (YELP), LinkedIn Corp (LNKD) and OpenTable — will never really amount to much, there is always the chance a greater fool buys the company out.
That’s what happened with OpenTable. Priceline Group Inc (PCLN) paid $2.6 billion for a company making $33 million in annual profit.
Where Groupon Stock Stands
GRPN has never solved a problem, and that’s what a company needs to do to have a sustainable business. Offering big discounts is not proprietary, either. Other companies quickly horned in on that space.
Most of these other internet businesses have some kind of model that might generate profit, as I mentioned, and might be worth a very modest P/E multiple.
Groupon stock will never have that chance. That doesn’t mean, however, that some idiot won’t buy it out. After all, Alibaba Group Holding Ltd (BABA) owns a 5.6% stake and a PE fund just dropped $250 million into it.
This mystifies me. Perhaps they see it as a local advertising play. What I see is that Groupon stock is valued at $2.5 billion on $20.7 million of profit, about what the OpenTable deal was worth … except the profit comes entirely from an income tax credit and discontinued operations.
Back that out, and Groupon stock had an operating loss of $80 million in fiscal year 2015 on $3.12 billion in revenue. Groupon’s SG&A expenses and cost of revenue alone wipe out all its gross revenue.
However, there are two other things about Groupon stock that need mentioning. It has $1.03 billion in cash and no debt; and it is free-cash-flow positive to the tune of $170 million.
That means GRPN has $1.78 a share in cash. At a stock price of $4.29, it means the business is being valued at $2.51 per share, or $1.47 billion. OpenTable sold for 40x free cash flow. Right now, GRPN trades for 8.5x free cash flow.
That takes us back to the greater fool theory. Considering that Alibaba and private equity firm Atairos Management put in big bucks, the natural conclusion is that one or both will continue to invest in GRPN stock, or buy it out. That most likely would happen later this year, because GRPN stock has a dual-class share structure that will expire. That’s also why a deal hasn’t happened yet.
So it suggests that GRPN stock may have an M&A upside to it, and not that much downside. Because GRPN stock is cash-flow positive, the cash on hand position shouldn’t change much. There is capex, but it has settled into a fairly regular amount each year.
Therefore, I think there may also be a floor to GRPN stock. It had hit $2.22 in February, and when Alibaba announced its stake, it shot up. So I think that’s a floor, and it has $1.78 in cash, so the market is probably undervaluing it.
So the bottom line is that this makes for a speculative buy, based solely on a possible M&A deal in the next 12 months. I don’t think we see anything like an OpenTable deal, but I wouldn’t put $7-$8 out of the question.
Just remember — it’s pure speculation.
As of this writing, Lawrence Meyers has no position in any stocks mentioned.
