Why Groupon Stock Deserves Your Attention
The Internet, and particularly e-commerce, has made many investors rich over the years. But not every e-commerce stock has had a ride as good as Amazon.com, Inc. (NASDAQ:AMZN).
Case in point: Groupon Inc (NASDAQ:GRPN) operates an e-commerce platform that connects customers with local merchants. The company has been in business since November 2008 and it completed its initial public offering (IPO) in 2011.
Rather than shooting through the roof like some other Internet stocks, GRPN stock hasn’t really been a hot commodity. Over the last five years, the share price plunged more than 50%.
So, does that mean profit-seeking investors should cross Groupon stock off their watchlist?
Not really. In fact, due to one possible scenario, the company might be able to provide oversized returns to shareholders.
Groupon Inc’s Financials
In the fourth quarter of 2018, Groupon earned an adjusted net income of $60.0 million ($0.10 per diluted share), representing a solid step up from the $41.7 million ($0.07 per diluted share) earned in the year-ago period.
In full-year 2018, the company’s adjusted earnings came in at $0.18 per diluted share, up 63.6% from 2017.
Moreover, unlike some down-and-out stocks of tech companies that burn through cash, Groupon is actually free-cash-flow-positive.
In 2018, the company generated $121.2 million in free cash flow. And if you exclude the company’s settlement payment to International Business Machines Corp (NYSE:IBM), you’ll see that Groupon’s free cash flow totaled $163.3 million for the year.
If Groupon Inc Pulls This Off, Its Shares Could Soar
You see, while Groupon hasn’t been an investor favorite, the company has nonetheless built a solid platform. With its app downloaded 195 million times, Groupon is one of the most recognized brands in the e-commerce business.
The company has also managed to capitalize on the trend of consumers shifting to mobile. In the fourth quarter of 2018, more than 70% of transactions on Groupon’s platform were made on mobile devices. (Source: “4Q18 Earnings,” Groupon Inc, last accessed April 4, 2019.)
More importantly, Groupon remains a key player in the world of online-to-offline (O2O) commerce. For those not in the know, O2O commerce is when businesses lead consumers from online channels to make purchases in physical stores, something that Groupon excels at.
In 2018, Groupon had 30.6 million active customers in North America and another 17.6 million internationally. That brings the company’s total active customers to a whopping 48.2 million for the year. (Source: “Groupon Announces Fourth Quarter and Fiscal Year 2018 Results,” Groupon Inc, February 12, 2019.)
Groupon also managed to make more money from each customer. In 2018, the company’s gross profit per active customer increased three percent in North America and one percent internationally.
Of course, the GRPN stock bears would argue that the market already knows about this information.
But here’s the thing: Groupon might not whet investors’ appetite as it stands, but for a company that wants to tap into the O2O business or expand its presence in e-commerce, Groupon can offer incredible value. In other words, Groupon could be an acquisition target.
And this is not just some random speculation. Last summer, it was reported that Groupon was seeking a buyer. (Source: “Groupon is looking for a buyer,” Recode, July 7, 2018.)
Furthermore, when answering an analyst’s question during the company’s latest earnings conference call, Groupon’s Chief Executive Officer, Rich Williams, said “there is interest in the company.” (Source: “Groupon, Inc.’s (GRPN) CEO Rich Williams on Q4 2018 Results – Earnings Call Transcript,” Seeking Alpha, February 13, 2019.)
I should point out that, in this day and age, acquisitions in the Internet industry tend to come at a hefty premium. For instance, when Microsoft Corporation (NASDAQ:MSFT) announced its plan to buy LinkedIn Corp in June 2016, it agreed to pay $196.00 per share for the company.
Note that, before the deal was announced, LinkedIn stock was trading around $131.00 apiece, so the acquisition premium was close to 50%. And as you would expect, LinkedIn shares skyrocketed on the news. (Source: “Microsoft Buys LinkedIn for $26.2 Billion,” Business Insider, June 13, 2016.)
Of course, I’m not saying that someone will buy Groupon stock at a substantial premium right away.
But here are the facts: at its peak, Groupon Inc commanded a market capitalization of around $15.0 billion and a stock price of over $25.00 per share.
Today the company trades around $3.50 per share and has a market cap of about $2.0 billion. If an Internet heavyweight with deep pockets wants to get a piece of the action in the O2O business, buying Groupon could be an inexpensive option.
Groupon Inc Stock Chart
Chart courtesy of StockCharts.com
At the end of the day, keep in mind that, despite its lackluster stock price performance, Groupon Inc has been improving its bottom line.
The company is a major O2O play with solid operations, its bottom line has been improving, and there’s no concern for cash burn.
Combined with its subdued stock price, Groupon looks like an attractive acquisition target. If the company finds the right buyer, GRPN stock could see material upside.