As Groupon Inc. inches its way through a turnaround, investors have fixated on the idea of an acquirer swooping in for a quick deal. They'd better be prepared for a long slog.
Groupon shares have surged more than 90 per cent since Feb. 2 and are at a seven-month high, closing Thursday at $4.86 (U.S.). The Chinese Internet giant Alibaba Group Holding Ltd. disclosed a 5.6-per-cent stake on Feb. 12, just after Groupon reported better-than-expected quarterly results. Last week, Alibaba was seeking a loan of as much as $4-billion, people with knowledge of the matter said, spurring speculation it might seek to buy the company.
Yet, at its current price, Groupon looks overvalued compared with peers, analysts say, making it less attractive to potential acquirers. The company is also in the middle of an overhaul to jumpstart growth and speed up the transition from a daily-deal e-mail provider to an online destination for people looking for bargains. Revenue will probably drop 3.5 per cent in 2016 before rising 5.5 per cent the next year, based on the average of analysts' estimates compiled by Bloomberg. Meantime, Alibaba can find faster-growing investments in places such as India, said Aaron Turner, an analyst at Wedbush Securities Inc.
"Those present better growth opportunities for Alibaba than the U.S. market that's dominated by Amazon," Mr. Turner said in an interview.
Groupon, based in Chicago, didn't return multiple requests for comment. Alibaba, in an e-mail, declined to comment.
Cheap to pricey
Groupon was among the cheapest Internet stocks a month ago. Now, it's trading in line with peers or a bit on the expensive side, said Tom White, an analyst at Macquarie Capital USA Inc. The company is trading at about 14 times estimated 2017 earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Auction site eBay Inc. – which has comparable, single-digit revenue growth – is trading at about eight times forward earnings.
An acquirer may want to wait to see whether Groupon's strategy is working – which could take some time. In the two years that ended in December, the shares sank 74 per cent as growth slowed, hurt by competition from sites such as Yelp Inc., and as spending by merchants on local promotions didn't meet projections. Chief executive officer Rich Williams, appointed last November, plans to increase marketing spending by as much as $200-million this year to attract more users and encourage them to visit the website rather than wait for an e-mail.
As Groupon evolves into a marketplace, it wants consumers to approach the site in the same way they go to Amazon.com Inc., said Peter Krasilovsky, principal at researcher Local Onliner.
"That really does take a reintroduction of the brand," Mr. Krasilovsky said in an interview.
Jane Loveday, a real estate agent in San Diego, is a Groupon fan, though she still sees it primarily as an e-mail-based service. In the past three years, she bought all her Groupons – for massages, a chiropractor visit, a photo book – by clicking on her e-mails. She's browsed the website for deals without finding what she wanted.
"I go to Amazon a lot more," Ms. Loveday said. "Amazon, you can find anything and everything. With Groupon, it's specific to the merchant and what they want to promote."
Brian Kayman, Groupon's interim chief financial officer, said on a conference call with investors last month that additional marketing in the fourth quarter attracted customers who spent more than new users in the year-earlier period. The company sold its one-billionth Groupon last month.
It'll take more than one-quarter of results to show the campaign is working, some analysts say. Steven Weinstein of ITG Inc. called it a "risky strategy."
"I am skeptical that the ramp-up in marketing will be successful," Mr. Weinstein said in an interview. His concern is that the additional spending will only attract bargain hunters, who won't remain loyal customers in the long term.
Groupon now operates in 28 countries, after exiting 17 including Sweden, Denmark and Norway. It's been streamlining the business in other ways, too. Last year, it sold a controlling stake in Ticket Monster, a South Korean e-commerce site. About two-thirds of 2015 revenue came from North America, and much of the rest from Europe, the Middle East and Africa.
A successful turnaround could make Groupon appealing to Apple Inc., Google parent Alphabet Inc., Facebook Inc. or Amazon, Macquarie's Mr. White said.
"If they show a little bit more progress, they could be an interesting target for any of the big platforms for whom local and mobile are more core," he said.
As for Alibaba, Bloomberg reported in November that the company increased its stake in marketplace Jet.com Inc., citing a person with knowledge of the company. It previously held a stake in online retailer Zulily Inc., now owned by Liberty Interactive Corp., and has invested in two Indian companies: online marketplace Snapdeal and One97 Communications, which runs the digital goods marketplace Paytm.
Alibaba's investment in Groupon "is likely not a signal of an imminent acquisition," Mr. White said, "but rather reflects Alibaba's interest in broadening its international investment portfolio."