There seems to be no let-up in Groupon’s (GRPN) winning ways.
Groupon shares were trading between 4% and 6% higher Thursday on an analyst upgrade, touching the $11 mark at times and putting GRPN’s year-to-date returns at a sizzling 125%.
Morgan Stanley’s Scott Devitt thinks there’s even more upside to go. He upped his rating from “equal weight” to “overweight,” targeting $14 per share, or about 35% better than Groupon’s Wednesday closing price.
Devitt’s reasoning: Groupon is making an effective transition from being a daily-deals business — which relies heavily on outbound email marketing — to becoming essentially a search engine for offers and promotions. What’s more, GRPN has been getting lots of traction with its mobile business.
However, Devitt currently stands in the Street minority. He and four other analysts have “buy” ratings on GRPN, while only one has a “sell” … but there are 17 “hold” ratings on the stock, and for stock analysts, “hold” usually stands as a code word for “sell.”
Of course, analysts generally are lagging indicators, usually opting for a conservative approach and avoiding bold predictions that could quickly put an end to their careers.
But if GRPN continues to improve its operations, a fun phenomenon could take hold in which analysts try to play catch-up and improve their targets on the stock, spurring more buying from investors, which then brings more analysts into the bullish camp.
However, despite the needling we’re giving analysts for their cautious nature, investors should tread with care, too.
GRPN’s run has made it awfully pricey, with the stock trading at 2.8 times revenues — even the king of commerce, Amazon (AMZN), sports a multiple closer to 2. Plus, turnarounds can be a volatile affair, and Groupon easily could report a so-so quarter its next time up at the earnings confessional, sending investors and analysts alike back in their shells.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.