Seeking Alpha
Value, growth at reasonable price, long-term horizon, dividend investing
Profile| Send Message|
( followers)  

Summary

  • Google offered to buy Groupon in 2010 for nearly $6 billion.
  • Groupon rejected the offer, but its enterprise value is now just $3.7 billion.
  • At a much more attractive price, and considering the strategic benefits remain, Google should make another offer.

Online coupon marketer Groupon (NASDAQ:GRPN) crashed 15% immediately after reporting earnings. Judging by its price action alone, you'd naturally assume there was little reason to be optimistic about the company. But underneath the scary stock decline is a company that is growing revenue and billings at fairly impressive rates. The company is steadily building its brand, both domestically and in new international markets.

After reporting earnings three months ago, Groupon crashed in a similar fashion, then proceeded to steadily climb back. Now that the same post-earnings collapse is happening again, it once again offers an intriguing entry point. And Groupon looks attractive not just to individual investors, but perhaps a takeover candidate as well.

Perhaps it's time for Google (GOOG, GOOGL) to kick the tires on Groupon once again and consider a buyout.

Don't overreact to the stock drop

When a stock opens 15% lower after reporting earnings, you know something has gone terribly wrong. In Groupon's case, investors appear to be panicking over revenue that came in a little lighter than analysts had anticipated.

In all, revenue jumped 23% to $751 million, although this was less than the $761 million expected by analysts. Still, it's hard to see reason for such a sell-off with 23% revenue growth. It's not as if this is a shrinking business. Also, Groupon's gross billings hit a record last quarter.

Geographically, Groupon is killing it internationally. While revenue from North America rose 12%, sales in Europe, the Middle East, and Africa soared 42%. Groupon's Rest of World segment posted stellar 40% revenue growth as well.

Groupon's success in under-developed markets is a direct result of its acquisitions. Late last year, Groupon acquired LivingSocial Korea and its subsidiary Ticket Monster in January for $260 million in cash and Groupon stock.

The deal was meant to expand Groupon's position internationally, and the results speak for themselves.

Why Groupon would be a great fit for Google

Groupon and Google are direct competitors. Google's Offers platform is a similar service, which allows users to instantly pull up offers on their phones and redeem them. Google is afforded an added luxury because its Offers service works in tandem with Google Maps and other applications to enhance the overall experience.

As opposed to going to war and having to spend tons of money getting ahead of one another, it makes better sense for Groupon and Google to team up. This was presumably the rationale behind Google's pursuit of Groupon several years ago.

You may recall that Google actually tried to buy Groupon once. According to several outlets, including The Wall Street Journal, Google offered to buy Groupon in 2010 for nearly $6 billion. Groupon rejected the offer, which obviously looks foolish in hindsight. But from Google's perspective, why not try again, now that Groupon's valuation is nearly $2 billion less than its offer four years ago?

It stands to reason the same benefits Google saw from a partnership with Groupon still hold true today. The only difference is that Google can snatch up Groupon for less money. Even assuming a healthy 25% premium to Groupon's $3.8 billion enterprise value, Google will still be saving around $1 billion from its previous offer.

Groupon's situation looks grim if you judge it solely by its stock price performance. But now that Groupon is at approximately $6 per share and a market capitalization of $4 billion, it's likely looking attractive once again to potential buyers.

Google would benefit strategically from buying Groupon, and financially as well, since Groupon's shares have performed so poorly this year. Likely synergies from an acquisition could produce even more savings. When you consider the benefits versus the costs, it makes a lot of sense for Google to once again come back to the table.

Source: Why Google Should Once Again Try To Buy Groupon