Groupon Inc: 22 Analysts Can’t Be Wrong (GRPN)

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GRPN - Groupon Inc: 22 Analysts Can’t Be Wrong (GRPN)

Source: By Seth Anderson, Groupon HQ, used under creative commons license

Just when it looked like Groupon (GRPN) shares might finally be in a position to pull themselves out of the ditch once and for all, an analyst comes along and upends the effort.

GRPN Stock: 22 Analysts Can't Be WrongSpecifically, UBS downgraded GRPN to a “sell” Wednesday, sending Groupon stock more than 8% lower and taking a hefty bite out of the GRPN’s bullish surge on news Alibaba (BABA) bought a stake in the company.

The downgrade is sure to ruffle feathers of faithful GRPN shareholders. In fact, it already has, with some of the more vocal Groupon investors making rather “colorful accusations” of UBS analyst Eric Sheridan, who explained the downgrade.

Funny thing is, Sheridan didn’t say much of anything most other analysts haven’t also suggested, and most of them are similarly unenthusiastic about the stock’s future.

Can 22 analysts collectively be wrong about one stock? Not likely.

UBS Downgrades GRPN

The downgrade from UBS came on Wednesday morning; the brokerage house lowered its opinion on Groupon from “neutral” to “sell,” and simultaneously set a target price of $3.20 for GRPN … about a third less than where the stock was trading as of Tuesday’s close.

Sheridan noted:

“While Groupon has recently shown signs of progress in its transformation to an eCommerce marketplace and its core initiatives (including streamlining its international operations or customer acquisition), we believe there is still a long road ahead in strengthening the company’s positioning in the local ad and/or local eCommerce market …

… In analyzing the relative competitive positioning of Groupon, we highlight a number of key weaknesses: a) marketing spend will pressure near-term margins; b) increased competition in Goods; c) mix shift to lower margin 1P business; and d) slowing customer and engagement growth.”

Sheridan went on to explain that recent local-centric efforts from deeper-pocketed Alphabet (GOOG, GOOGL) and same-day deliveries from Amazon (AMZN) were creating a real headwind for Groupon’s revamped local-oriented effort that then-new CEO Rich Williams heavily touted in this open blog entry posted just two weeks after he took over. Namely, he said:

“…we have unprecedented experience in local, and what we believe is the right vision and strategy to make our goal of becoming the daily habit in local a reality.”

Were UBS’ Sheridan the only one doubting the company’s new locally oriented shtick, it might be dismissible. But he’s not the only one. Piper Jaffray’s Gene Munster downgraded GRPN in November specifically because he knows locally driven web marketing is difficult.

It’s also worth noting that Amazon.com — which clearly has a much greater reach than Groupon — shut down its local daily deals business in October (just a few days before Williams was named Groupon CEO), underscoring the idea that local-advertising is a tough business … and Amazon clearly had more resources to make it work than Groupon does.

Bottom Line for Groupon Stock

Giving credit where it’s due, Groupon did post better-than-expected fourth quarter results in February — Williams’ first as CEO — topping sales as well as operating profit estimates. On a GAAP basis though, operating expenses jumped above total sales and the company logged yet another net loss.

Rome wasn’t built in a day, of course, but we’ve yet to see any real evidence that Williams’ new “local” plan is actually doing any real good. The first quarter results released in May will be the litmus test.

But can Groupon Inc shareholders take solace in the fact that Alibaba has taken an interest by virtue of its investment in Groupon stock unveiled in February? Couldn’t that relationship lead to something bigger, up to and including an acquisition?

Maybe, but as was the case with Groupon’s revamped localized bent, Alibaba’s interest may have been made out to be more than it really is. A statement from Alibaba plainly read:

“We bought a very small minority stake in Groupon in order to share ideas between U.S. and China markets. This is a passive holding and if Groupon management would like to exchange experiences with us, we are prepared to share.”

Sure, Jack Ma might want to scoop up Groupon to gain a toehold in the U.S. market, but more plausibly, Ma knows the U.S. is a market currently dominated by Amazon. If anybody was going to “win” at the local game in the United States, Groupon is still in the weakest position to do so simply because it’s still struggling to reposition itself in U.S. consumers’ minds.

Whatever the case(s), as much as a handful of Groupon owners are protesting, the fact that analysts as a group still mostly have their doubts can’t be dismissed.

GRPN Analyst Opinions, Estimates
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As of the latest look, 22 analysts are following Groupon. Of those, 15 have (generously) deemed GRPN a hold; three are calling it an outright sell; and four other analysts are calling it a buy or a strong buy. But even then, the average target price for GRPN is a mere $3.59 vs. the current price of $4.18.

Is it possible the analyst community just doesn’t understand what Groupon is doing to become viable? Sure, anything’s possible. It’s just not likely. The UBS downgrade is a completely rational one.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/grpn-groupon-stock-downgraded/.

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