- Groupon stock has surged more than 90% over the past one week or so. Can Groupon stock sustain the current momentum?
- Alibaba has recently bought 33M shares of Groupon.
- By buying out Groupon, Alibaba would acquire its eCommerce business on the cheap.
Groupon (NASDAQ:GRPN) stock has surged more than 90% over the past few days in what is shaping up to be one of the best periods for the stock in several years. Groupon stock has been benefitting from two major catalysts that emerged over a period of a single week: Groupon’s Q4 2015 earnings beat with strong growth in North American billings followed by an announcement by Chinese eCommerce giant Alibaba that it had bought 33M shares of Groupon, equivalent to a 5.6% stake, in its 13F filing. Groupon stock is now solidly in the black--up 33.2% YTD after losing ~70% of its value in 2015.
Groupon Stock 1-Month Returns
Source: CNN Money
Groupon Q4 2015 Results
Groupon stock surged about 20% after the company announced Q4 2015 earnings. The daily deals leader reported revenue of $917.2M, down 0.9% Y/Y but up 4% up when adjusted for the divestiture of Korean deals site, Ticket Monster, or TMON, which it sold for $360M in April 2015. The reported revenue exceeded the consensus on Wall Street by $71.3M. The company reported non-GAAP EPS of $0.04, $0.04 better than consensus estimates. On a GAAP basis, Groupon reported EPS of $(0.08), considerably worse than EPS of $0.01 the company reported in Q4 2014.
It was Groupon’s billings trends that got the market excited and offered some hope that perhaps the company’s battered business was finally coming back to life. Although Groupon reported that its gross billings had declined 1% during the fourth quarter to $1.71B (+4% exc. forex), investors were encouraged that the slowdown was much less severe compared to mid-single digits declines (-2% during Q3 2015) in past quarters. Moreover, gross billings in the all-important North American market surged 10.7% Y/Y to $1.05B. The North American market is Groupon’s most important market and contributed $550.974M, or 60% of overall revenue, during the quarter after growing a healthy 13% Y/Y.
Unfortunately Groupon’s international markets continued showing signs of serious malaise. EMEA gross billings were down 13.1% to $487.1M while ‘‘Rest of World’ billings declined 21.4% Y/Y to $169.5M. Revenue trends in Groupon’s international markets were not favorable either with EMEA revenue down 8.9% to $248.326M while Rest of the World revenue posted a precipitous decline of 22.7% to $46.197M. This suggests that the company could be streamlining its unprofitable international operations as it had earlier promised.
There was another notable positive in the report that triggered excitement amongst investment circles: an increase in Groupon’s take-rate. Groupon’s take-rate has come under pressure lately as the company had lowered its commission rates on its daily deals business in a bid to woo unwilling merchants to sign up to its platform. During the fourth quarter, Groupon’s take-rate clocked in 53.73%, an increase of 252-basis points compared to the previous year’s comparable quarter. This suggests that the company is jettisoning its low-margins goods business categories under its new CEO as it had promised during its third quarter earnings call:
"I'm assuming the CEO role with three immediate priorities. First, we will renew our investment in customer acquisition to introduce more new customers to our marketplace and accelerate growth. Second, we will increase our focus on streamlining our international operations to ensure we are operating as lean and efficiently as possible. Finally, we will shift our Shopping category away from lower-margin empty calorie products to grow a sustainable, healthy Goods business with stronger margins."
The reason why Alibaba is interested in Groupon
Looking at Groupon’s segment performance reveals a stark contrast between the company’s core daily deals business and its eCommerce business, and the reason why Alibaba (NYSE:BABA) could be interested in a merger with Groupon sometime in the future. Groupon’s daily deals business reported gross billings of $812M, -4%Y/Y with revenue of $279.7M, down 6% Y/Y. The company’s eCommerce business continued to grow in tandem with previous quarters. Groupon’s Goods business posted billings of $720M, up 4% Y/Y while revenue increased a healthy 10% Y/Y to $602.3M.
Meanwhile, Groupon reported that it finished the quarter with 48.9M active customers, up 1.5M Y/Y and 0.3M Q/Q. Average revenue per customer fell slightly from $132 during Q4 2014 to $130. As Verizon (NYSE:VZ) recently pointed out in its merger bid with Yahoo (NASDAQ:YHOO) a platform with a growing or even stable user base tends to receive a high valuation. For all its woes Groupon’s user base is still expanding which bodes well for the company if a company like Alibaba becomes interested in a merger.
Groupon’s healthy eCommerce business and its continued strength in the North American market could be the reason why Alibaba has taken a significant stake in the company. Groupon has another 60M or so customers who have downloaded its app but are not active on its platform. Alibaba has 376M active customers or about 7.5 times as many as Groupon yet Alibaba’s revenue is only 5.7 times bigger than Groupon’s. Groupon’s average revenue per customer is, therefore, a significant 1.3 times bigger than Alibaba’s. By buying out Groupon, Alibaba would acquire its eCommerce business on the cheap.
Can Groupon stock maintain the momentum?
A discounted cash flow analysis of Groupon by a fellow Amigo Bulls contributor suggests that Groupon stock is still trading at a 22% discount to its fair value despite the recent huge rally. DCF takes into account the projected growth rate of a company many years out. But maybe Groupon will not have to wait that long before a suitor comes in.
Alibaba has never really succeeded in cracking the North American market. By acquiring Groupon, the company can immediately get a significant number of North American customers and might even be able to entice the 60M inactive Groupon customers to try out its platform. Alibaba was rather vague about its real reason(s) for buying a stake in Gruopon:
"We bought a very small minority stake in Groupon in order to share ideas between U.S. and China markets in a space... This is a passive holding, and if Groupon management would like to exchange experiences with us, we are prepared to share,"
While that statement is not conclusive in any way, it appears as if Alibaba is opening the door to something bigger. Groupon’s stock is likely to keep investors interested in the company on the basis of a possible takeover or simply because the company’s business is beginning to show signs of stability.