- Groupon stock has been rallying strongly again after Comcast expressed an interest in partnering with the daily deals leader.
- The last major rally was triggered by Alibaba buying a sizable chunk of Groupon shares.
- The wave of interest by companies in partnering with Groupon has increased hopes of a merger. Groupon Inc. stock is a good contrarian play.
Groupon Inc. (NASDAQ:GRPN) stock has been extremely volatile over the past few months making double-digit gains and losses every 30 days. The stock rallied a massive 75% in the month of February. The first 20% rally was triggered by the company beating earnings estimates during its Q4 2015 earnings call which beat analyst estimates on both top and bottom line. The second, and bigger, rally was set off by news that Alibaba (NYSE:BABA) had purchased 33M Groupon shares for a 5.6% stake in the company.
Groupon stock gave up some of those gains in the month of March as investors remained deeply divided about the company's prospects. But the stock is on the march once again, gaining 14.4% over the past five days after news emerged that Atairos, a company backed by cable giant Comcast -A (NASDAQ:CMCSA) and run by former Comcast CFO Michael Angelakis, had invested $250M in the company, good for a 6% stake. Atairos will purchase $250M worth of convertible debt from Groupon with Michael Angelakis joining Groupon's board. Groupon said that it will work with Comcast to explore strategic partnership opportunities.
Groupon Stock 5-Day Returns
Source: CNN Money
It's not entirely clear how the two companies will work together given their different business models. But Comcast Cable CEO Neil Smit hinted at linking the two companies' advertising networks:
“The potential in combining Groupon's local expertise with Comcast's vast subscriber and advertiser network is something we look forward to closely exploring together,”
But the market is probably once again thinking about the possibility of Groupon as a merger candidate. Groupon's huge number of customers and cheap valuation is continuing to be a magnet for companies interested in a merger. Groupon finished Q4 2015 with 48.9M active subscribers and another 60M inactive customers. Meanwhile, Comcast has 22.3M video subscribers, 23.3M internet subs, and 11.5M phone customers. But most of these customers buy bundled services from the cable company with many having a double or triple play on its three products. Comcast's unique subscribers totals just 27.7M.
Groupon's huge number of subscribers and cheap valuation is perhaps the reason why Alibaba and Comcast are interested in partnering with the company. By partnering with Groupon, Comcast would have a good opportunity to cross-sell its products to Groupon's customers. Further, Comcast's ad division Spotlight offers daily discount deals for marketers and local businesses. The business would, therefore, benefit from Groupon's expertise in local deals.
Ultimately Groupon's large userbase might tempt Comcast to simply buy the company outright instead of merely partnering with it. Customer acquisition costs for cable companies tend to be quite high. At a market cap of just $2.6B compared to Comcast's $148.6B, Comcast would get its hand on Groupon's huge number of customers on the cheap and would probably be able to lure a good number of those customers to sign up for its own services.
The same case goes for Alibaba. Even though Alibaba has close to 380M users, it has never really made much progress in the North American market. By merging with Groupon, the company would immediately gain a good foothold in this market and would be in a good position to leverage Groupon's knowledge of the market.
The Bottom line
Investors have all along suspected that Groupon could be a good merger candidate due to its cheap valuation and relatively large userbase. But until now, there had been no solid moves from companies that could potentially merge with the company. Now that this is finally happening, it is a real possibility that investors can no longer overlook.
Groupon stock is up 45.3% YTD but is still trading 75% below its five-year highs:
Groupon Stock 5-year returns
Source: CNN Money
Comcast's and Alibaba's interest in partnering with Groupon has come at a time when new CEO Rich Williams has come in and started implementing a new strategy at the company. This tells you that these companies are confident that Groupon is on the right track to recovery. Groupon stock might still have places to go and could go on to make strong gains over the next 18-24 months. This makes Groupon stock a good contrarian play.