Groupon's Lingering Red Flags May All Be Priced In After 40% Correction

Shares of Groupon Inc GRPN have plummeted 40 percent since it reported Q3 EPS results on October 26. While the company continues to face “substantial fundamental challenges,” these now appear to be “largely priced in,” following the share price correction, RBC Capital Markets’ Mark Mahaney said in a report.

Mahaney upgraded the rating on Groupon from Underperform to Sector Perform, saying that the valuation now seemed “reasonable.” The price target remains at $4.

The Positives

“On the positive side, we have viewed the company’s successful efforts to streamline its International footprint and reduce its Goods Billings as fundamentally correct,” Mahaney wrote. He added that the company was consistently buying back its shares and still had an additional authorization of $245 million remaining.

Groupon’s current cash and equivalents level, at $690 million, represented “a very healthy” 35 percent of the company’s market capitalization.

The Concerns

Following the Q3 EPS print, the analyst mentioned three concerns:

• Fundamental trends – “We question the sustainability of Groupon’s trends. We believe the attainment of double-digit NA Local Billings growth with record-low Take Rates is a risky strategy,” Mahaney mentioned.
• Competitive threats continue – with the largest internet platforms, namely Amazon.com, Inc. AMZN, Facebook Inc FB and Alphabet Inc GOOGL, growing their local presence, which translates to higher costs associated with a successful turnaround of Groupon
• “Lingering Red Flags – Especially that the North America Local Revenue Take Rate dipped to its lowest level ever,” the report added.
• Image: Mike Mozart, Flickr