This Could Be Huge for Groupon Stock
If you bought Groupon Inc (NASDAQ:GRPN) stock at the beginning of this year, you’re likely to be smiling now. In the past three months, Groupon stock surged a whopping 70%. The best part is that the company has a shot at winning the next big thing. No, I’m not talking about virtual reality or drones—I’m looking at O2O.
O2O, or online-to-offline commerce, might sound like a complex term, but it’s really not that hard to understand. It’s basically a strategy that brings consumers from online channels to physical stores. When you book something on an app and go to a store to get the item or enjoy the service, that’s O2O commerce at work.
And that’s exactly what Groupon started with. The company was founded as a group buying site, offering consumers deals for offline consumption. Today, however, a significant portion of Groupon’s revenue comes from its goods business, which is basically selling products from the web site.
So Groupon has moved into e-commerce, which might look like a good thing. When you have decent traffic numbers to your web site, why not sell some stuff there? However, the e-commerce industry is dominated by Amazon.com, Inc. (NASDAQ:AMZN), which means Groupon will likely see limited opportunity and limited margins in this business.
What Groupon could do is go back to its roots—online-to-offline. This time, it might be able to get some help from one of its new shareholders.
Alibaba Group Holding Ltd (NYSE:BABA) disclosed its 5.6% stake in Groupon back in February. Its 32.97 million shares of Groupon make Alibaba the fourth-largest shareholder of Groupon. (Source: “Form 13F,” Securities and Exchange Commission, February 12, 2016.)
Despite its significant stake, Alibaba is not going to be an activist investor. Instead, the company wants to exchange ideas between the U.S. and the Chinese markets. In particular, it said, “if Groupon management would like to exchange experience with us, we are prepared to share.” (Source: “Groupon Soars Again, This Time After Alibaba’s 5.6% Stake,” Bloomberg, February 16, 2016.)
You might think that Groupon can learn from Alibaba’s e-commerce expertise. Although the gross merchandise volume on Alibaba’s e-commerce platform is absolutely enormous, what Groupon could really benefit from is the company’s experience in O2O.
You see, Alibaba is behind the largest group buying site in China—Meituan-Dianping.
Meituan raised $3.3 billion in its latest round of funding. The company now has a valuation of $18.0 billion. (Source: “Meituan-Dianping, China’s Largest Group Deals Site, Closes Massive $3.3B Round At $18B Valuation,” TechCrunch, January 20, 2016.)
The neat thing is that Meituan is more than just an app. It has created an O2O ecosystem in the Chinese consumer market. Today, the company is effectively a combination of Groupon, Yelp, and food delivery.
Fortunately, Groupon has already taken several steps toward boosting its O2O presence. The company acquired online and mobile food ordering and delivery company OrderUp last year. After the acquisition, Groupon rolled out its own food delivery service, “Groupon to Go.” (Source: “Groupon Serves Up Groupon To Go™–a Delivery and Takeout Service that Saves Customers 10 Percent or More on Every Order,” Groupon Inc, July 30, 2015.)
Of course, expanding its O2O presence is not going to be an easy task. But since Alibaba came on board, sentiment has started to change around GRPN stock.
In February, Morgan Stanley analyst Dean Prissman said that based on his team’s survey and churn analysis, satisfactory rates for “Groupon Local” were “remarkably high,” and “satisfied customers equals stable demand.” Going forward, Prissman sees “continued stability” in Groupon Local. The analyst has a $9.00 price target on GRPN stock, implying a more than 100% upside potential. (Source: “Morgan Stanley on Groupon: ‘Satisfied Customers Equals Stable Demand’,” Benzinga, February 26, 2016.)
The Bottom Line on GRPN Stock
Right now, Groupon has a solid business in place. If it manages to learn something about O2O from its new stakeholder, GRPN stock could see some serious upside down the road.