Time to Bail on Groupon Stock?
In February, Groupon Inc (NASDAQ:GRPN) started a solid recovery. Groupon stock more than doubled from $2.22 on February 9 to hit $4.79 on March 9. However, shares were down some nine percent today as UBS downgraded GRPN stock. What could explain this sudden shift in sentiment toward a company that is experiencing rapid growth?
Indeed, Groupon is also expanding in Europe. It plans to go big by using all media for advertising. Until recently, Groupon has concentrated its advertising on Internet and social media strategies. It now plans to go more mass-market channel by using TV advertising.
Meanwhile, the company continues its strategy to strengthen the market. It has launched a “Black Friday”-like sale in March, dubbed “March Madness” beyond North America. It’s a campaign to celebrate the sale of its one-billionth coupon. But it is also offering more and more offers and deals, including discounts on more luxurious brands. (Source: “Groupon conducts ‘Black Friday in March’,” KMTV, March 4, 2016; http://www.kmtv.com/news/national/groupon-conducts-black-friday-in-march.)
At the same time, Groupon stock is benefiting directly from a growing Chinese investment in U.S. companies. Alibaba Group Holding Ltd (NASDAQ:BABA) is now the coupon web site’s fourth-largest shareholder.
Despite the upside, there are always threats to a bullish run. Groupon stock has fallen victim to IBM. “Big Blue” is suing Groupon for using technologies based on patents going back to the eighties and early nineties without paying royalties. More specifically, IBM accuses Groupon of violating the use of four patents related to “Prodigy,” the PC dialup service developed by a consortium of companies, including IBM, in the 1980s.
In 1990, Prodigy became the world’s second-largest online services provider. In 1994, it was the first platform to offer full access to the World Wide Web and hosting services. Prodigy is now part of the archaeology of the Internet and had almost dropped into permanent oblivion. Almost, that is, until IBM revived it in an effort to transform it into a nightmare for Groupon. (Source: “IBM sues Groupon over 1990s patents related to Prodigy,” Arstechnica, March 3, 2016; http://arstechnica.com/tech-policy/2016/03/ibm-sues-groupon-saying-it-infringes-patents-related-to-1990s-prodigy-service/.)
Yet, Groupon is not alone. IBM has also sued Priceline, Twitter, and Amazon.com. It also claims that Facebook has infringed on its patent when users sign into an app through Facebook. (Source: Ibid.) This single sign-on technology patent is actually used by many apps and web sites to connect to networks like Facebook.
IBM demands Groupon stops using such technology and pays damages. Groupon’s fate now lies in a Delaware court. But, before they too are intimidated by IBM’s litigiously inclined revenue-generating strategy, Groupon shareholders should consider the lawsuit’s actual chances of success. (Source: “Did Groupon (GRPN) Actually Infringe on an International Business Machines (IBM) Patent?” Smallcap Network, March 9, 2016; http://www.smallcapnetwork.com/Did-Groupon-GRPN-Actually-Infringe-on-an-International-Business-Machines-IBM-Patent/s/via/1789/article/view/p/mid/3/id/756/.)
Reduced to the basics, the IMB lawsuit suggests that the way Groupon interacts with browsers is an IBM invention. (Source: Ibid.) If the courts can prove that IBM is trying to exploit a flaw in the U.S. patent system for no other reason than monetary gain, then it will lose. The U.S. Patent Office is reluctant to issue patents for abstract ideas. This means that software is difficult to patent.
The Delaware court may also dismiss IBM’s claims, because a patent cannot prevent competition simply because a competitor does something similar to the patent in question. (Source: Ibid.) After all, Groupon is not selling the technology to other web sites; it is merely using it to sell goods, as does every other website that has fallen into IBM’s viewfinder.
The best hint of how the lawsuit might go comes from Andrew Mason, Groupon’s founder and former CEO. He tweeted that IBM finally got him: he stole “the idea to sell goods and services at a discount from Prodigy.” (Source: “Groupon is focus of IBM’s latest patent-infringement suit,” Chicago Tribune, March 9, 2016; http://www.chicagotribune.com/bluesky/originals/ct-ibm-sues-groupon-bsi-20160302-story.html.)
Groupon is a marketplace where shoppers can find deals on goods and services from restaurants to spa treatments and jewelry. The company expanded quickly abroad, but had to leave with its tail between its legs from 17 countries. It still operates in 28. (Source: “Groupon Soars Again, This Time After Alibaba’s 5.6% Stake,” Bloomberg, February 16, 2016.)
For those fearing that Alibaba may sell Groupon just as easily as it bought it, consider the important benefits. Through Groupon, Alibaba gains access to U.S. technology, especially in improving restaurant or even hotel booking services. It can adapt that technology in China to strengthen its dominance in a fast-growing area of the Internet commerce space.
Meanwhile, there is always Alibaba. The possibility that Alibaba is weighing the opportunity to buy the whole company is worth considering. Buying more than five percent of the company just to learn Groupon’s buying practices seems a tad exaggerated. At a market value of $1.6 billion, Alibaba could easily take over Groupon. (Source: “Alibaba Eyeing Buyout Bid with Groupon Investment?” Fortune, February 15, 2016.)
Alibaba wants to compete in the group buying sector. The online search engine Baidu, a Chinese equivalent of Google, has invested in the Nuomi group buying site, a Groupon rival. Thus, a Groupon buy could help Alibaba gain a prime spot in the sector—even if (for now) Groupon has minimal presence in the Chinese market. (Source: Ibid.)
All things considered, now isn’t the time to cross GRPN stock off your watch list.