Tiger Global Management LLC, an $8 billion hedge fund run by Chase Coleman and Feroz Dewan, has acquired 65 million shares of Groupon (Nasdaq:GRPN) for $202 million. The 9.9% stake signals to investors there's still some life in the online goods and services discounter. Although beauty is in the eye of the beholder, I have to think this move wasn't a spontaneous one. I'll look at some of the reasons why the hedge fund chose to make such a large investment.
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A quick look at Tiger Global Management's holdings shows that it dipped its toe in Groupon's water sometime between April and June of this year, buying 1.3 million shares. It acquired the remainder in the third quarter. You'll also notice that many of its investments, at least the publicly traded ones, are technology related. In its Q3 report I count no less than nine investments of over $100 million that participate in the technology sector, including $1.7 billion in Apple (Nasdaq:AAPL), $527 million in Google (Nasdaq:GOOG) and $254 million in Facebook (Nasdaq:FB). With the $202 million investment, Groupon becomes Tiger Global's 15th largest holding out of 43. Chase Coleman founded Tiger in 2001 after working for Julian Robertson for three years; he got whacked pretty good in 2009 as a result of investing in financial stocks. He's since refocused on technology investments where his hedge fund's had a lot of success. Buying into Groupon speaks volumes.
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Some media pundits have suggested that Groupon's testing of retail stores in Asia where customers can try out products they're interested in buying as well as pick up items they've purchased through Groupon Goods, rather than waiting for them to be delivered, has Coleman intrigued about the future. Forbes contributor Panos Mourdoukoutas makes a valid point that Groupon is turning its customers into product evangelists who are providing word-of-mouth advertising for new products ultimately reducing its marketing costs to the merchants. It's clear that the business of daily deals can only take Groupon so far. By expanding its suite of merchant tools to include Groupon Payments and Breadcrumb, its iPad-based point-of-sale system for restaurants, Groupon is providing additional reasons for merchants to stick with it.
In its Q3 conference call, CEO and co-founder Andrew Mason makes it clear Groupon is moving towards an e-commerce marketplace that allows its more than 200 million subscribers to easily find deals on its site rather than simply receiving emails telling them about them. At the end of Q3, it had 27,000 active deals available, 13 times more than a year earlier. Its become less of a push marketer emailing deals and more of a pull marketer where subscribers can browse for them instead. The addition of Groupon Goods in 2011 allows it to offer large companies the scale necessary to move merchandise quickly. According to Mason, it sold almost 30,000 GPS units for Garmin (Nasdaq:GRMN) a few weeks ago in just 24 hours. The concept must be working because Groupon Goods reached an annual run-rate of almost $1.5 billion in global billings in the quarter and its active customers increased 37% year-over-year to 39.5 million.
Groupon expects 2012 revenue of at least $2.32 billion and operating income of $190 million. Its free cash flow for all of 2011 was $247 million. I expect that it will be well over $300 million this year. While analysts continue to revise Groupon's earnings downward, evidence seems to suggest it's getting financially stronger. Three months ago, the analyst consensus estimate for 2013 was 39 cents per share. Today that sits at $0.24, an almost 40% downward revision. If you back out the $1.83 per share in cash from its Nov. 20 closing price of $3.37, you get a forward 2013 P/E of 6.4. I think I'm starting to see why Coleman bought such a large stake. The downside is limited at this point.
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The Bottom Line
Chase Coleman is one of the few people who has both worked for Julian Robertson and received seed money to start his or her own hedge fund. That makes him special. Tiger Global Management believes Groupon's a good buy; I have no reason to doubt one of the most successful offspring of the Tiger Fund.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.