Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Does Groupon Have a Future?

No social media company has suffered more at Mr. Market’s hands than Groupon (NASDAQ: GRPN). The coupon app provider’s stock was trading at $4.32 a share on Feb. 22, 2016, despite reporting a revenue of $3.12 billion for the fourth quarter of 2015.

The picture we get at Groupon is much like that at other social media companies, such as Yelp (NYSE: YELP) and Twitter (NYSE: TWTR). Strong revenue growth, combined with low stock prices and weak financial numbers.

Groupon’s revenue continued to grow modestly in 2015, increasing by around $78 million. What seems to be worrying is the slowing of Groupon’s revenue growth; revenues only rose from $3.042 billion to $3.12 billion. That could indicate Groupon has reached the limits of its business model.

Other factors, such as declining sales and foot traffic at brick and mortar retailers, a slowing U.S. economy, and waning interest in Groupon on the part of the public could play a role. Some businesses have turned against Groupon because its deals are more of a nuisance than a sales generator.

Naturally, investors will want to know if Groupon makes money or has other value. This question is being driven by news that Alibaba Holdings (NYSE: BABA) has been quietly buying Groupon’s shares. People are wondering if Jack Ma knows something that we do not.


Does Groupon Make Money?

Part of the reason why social media companies are such a tough sell to investors is that it is often hard to see how they make money. Groupon is no exception. It does make a little money, but the company seems to struggle for that income.

On Dec. 31, 2015, Groupon reported a net income of $20.67 million, a negative profit margin of -5.07%, and a free cash flow of $232.38 million. Groupon’s profit margin was low, but it did have quite a bit of cash for a company of its size and low share price.

In addition to the free cash flow, Groupon reported $853.36 million in cash and short-term investments and $254.87 million in cash from operations. That indicates Groupon has quite a bit of float. This might be what interests Mr. Ma. Groupon’s technology actually seems to be generating float; its business model is self-sustaining.


Why is Jack Ma Interested in Groupon?

The low price may have also piqued Ma’s interest; Groupon is a company with $3.12 billion in revenue and a market cap of $2.477 billion. The interesting thing is that it is still considered overvalued by the analysts. Groupon had an enterprise value of $1.548 billion on Feb. 22, 2016.

There could be other reasons why Alibaba might want Groupon; it could have proprietary technology (or patents) that might help Ma expand his ecosystem. Groupon could also give Ma another entry into U.S. retail, which he has been trying to crack for some time.

Forbes contributor Panos Mourdoukoutas thinks that Groupon could serve as a marketing platform for Alibaba in North America. This thinking is not as farfetched as we might think. Groupon could serve as a means of introducing Alibaba’s payment app Alipay and some of its other digital products in the U.S. and Canada.

Is Jack Ma Going Shopping?


The Chinese retail giant might need such a platform because growth is slowing in its home market. One possibility is that Jack Ma is about to go on a shopping spree in the U.S. stock market. There are some fairly cheap companies out there that could expand Alibaba’s North American businesses.

Possibilities include other social media solutions like Twitter and Yelp, PayPal Holdings (NASDAQ: PYPL), eBay Inc. (NASDAQ: EBAY), the popular, but spectacularly unprofitable music streaming service Pandora (NYSE: P), entertainment companies like Starz (NASDAQ: STARZB) and Lions Gate (NYSE: LGF), and ailing retailers such as JC Penney (NYSE: JCP), Office Depot (NYSE: OD), Sports Authority, and Sears (NASDAQ: SHLD). Any of these could increase Alibaba’s American market by opening doors to new customers.

More importantly, many of these companies are very cheap right now. Office Depot was trading at around $5 a share on Feb. 22, 2016 for example.

This brings us to our final question. Is Groupon a dying brand or a value bargain? I would call it a bargain because the company has float and a low cost. It also has some good assets that at least one major player in the industry is interested in. Therefore, Groupon would be a good buy if you are looking for a cheap ecommerce or social media stock to add to your portfolio.

Disclosure: The Blogger owns shares of PayPal and eBay.