Okay, you are probably regretting not buying Groupon Inc (NASDAQ:GRPN) stock before it skyrocketed for two trading sessions.
But wait, the stock was down more than eight percent on Wednesday morning. Now, before you decide to jump in, let me tell you what Alibaba’s stake really means for Groupon and its investors.
The beginning of 2016 hasn’t been that great for companies in the Internet industry. For instance, e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) is down 21.8% year-to-date.
Groupon stock, on the other hand, just had its biggest one-day gain since its initial public offering (IPO). After Alibaba Group Holding Ltd (NYSE:BABA) disclosed its 5.6% stake in the company, GRPN stock skyrocketed 41.2%! (Source: “Groupon Soars Again, This Time After Alibaba’s 5.6% Stake,” Bloomberg, February 16, 2016.)
According to Alibaba’s 13F filing with the U.S. Securities and Exchange Commission (SEC), the company owned 32.97 million shares of Groupon at the end of December 2015. That makes Alibaba the fourth-largest shareholder of the company. (Source: “Form 13F,” SEC, February 12, 2016.)
Note that despite Alibaba’s sizeable stake, it will not be an activist investor. Instead, Alibaba said, “We bought a very small minority stake in Groupon in order to share ideas between U.S. and China markets. This is a passive holding and if Groupon management would like to exchange experiences with us, we are prepared to share.” (Source: “Groupon Soars Again, This Time After Alibaba’s 5.6% Stake,” Bloomberg, February 16, 2016.)
So, it’s about learning from each other. From Groupon, Alibaba could get more insight into the U.S. consumer market. But what exactly can Groupon learn from the Chinese e-commerce giant?
What Groupon Can Learn from Alibaba
In case you haven’t noticed, Groupon hasn’t really been on top of its game in the last few years. And investors weren’t happy. Despite the surge in the previous two trading sessions, Groupon’s stock price is still down more than 86% since its November 2011 IPO.
The problem is that Groupon simply wasn’t doing that well in the group buying business. Today, a significant portion of the company’s revenue comes from its goods business, which is basically selling products from its web site—or e-commerce.
At first glance, the strategy makes sense. A lot of people are visiting Groupon’s web site, so it seems natural to sell some merchandise there. However, when it comes to selling stuff online, Groupon is absolutely dwarfed by e-commerce giant Amazon. The presence of industry giants could not only limit Groupon’s business potential, but also suppress its margins.
That’s why Groupon should really focus on what it was always meant to—group buying. On that front, the company might want to learn something from its fourth-largest shareholder.
But isn’t Alibaba also an e-commerce company? How can it help Groupon’s group buying business? Well, as it turns out, Alibaba is also behind the largest online-to-offline (O2O) company in China: Meituan–Dianping.
To put it simply, Meituan brings consumers from its online app to physical stores. Whether you are going to a restaurant, watching a movie, getting a haircut, or ordering takeout, Meituan has great deals. Consumers pay for these services through Meituan’s app and enjoy them in stores. The company is like a combination of Groupon, Yelp, and food delivery.
To give you some idea of what Meituan’s market looks like, here are some numbers:
In 2015, the market size for China’s location-based services was worth about six trillion yuan (US$920 billion). By 2017, the market is expected to grow to 7.2 trillion yuan (US$1.1 trillion). Location-based services include restaurant bookings, movie ticket purchases, and food deliveries. (Source: “China’s Big Web Deal: Five Key Numbers for Meituan, Dianping,” Bloomberg, October 8, 2015.)
Whether they are in China or in the U.S., consumers have at least one thing in common—the love for great deals. By offering great deals, Meituan managed to build an O2O empire.
Groupon already has solid brand awareness in its markets and some of its deals do look great. The problem is that there are not enough local businesses available on Groupon, which limits the selection of deals for consumers.
For Groupon to really turn itself around, it will need to expand aggressively in terms of getting local businesses on board. Moreover, it also needs to let consumers know that there are more great deals nearby.
Achieving those two goals would take a significant amount of effort. Luckily, Alibaba Chairman Jack Ma might be willing to let Groupon in on some secrets on how Meituan successfully achieved that.
The Bottom Line on GRPN Stock
At the end of the day, Groupon is still a solid company. It generated $3.1 billion in revenue last year and had more than $850 million in cash by the end of December. And what about the company’s market cap? It sits at $2.39 billion. (Source: “Groupon Announces Fourth Quarter and Fiscal Year 2015 Results,” Groupon Inc, February 11, 2016.)
Expanding its O2O business is going to be a long-term endeavor for Groupon, even when it’s getting advice from Alibaba. But at today’s valuation, GRPN stock could have a lot of potential.