Groupon Is Trying To Evolve, But UBS Isn't Buying It

Despite Groupon Inc GRPN’s measured attempts to improve operations and appeal to consumers, UBS Investment Bank said the company is stifled by retail challenges and rising competition from the likes of Alphabet Inc GOOG GOOGL and Facebook Inc FB.

Analyst Eric Sheridan expects tech rivals to continue poaching local ad dollars and e-commerce opportunities critical to Groupon’s revival, while Amazon.com, Inc. AMZN begins to seize market share through its same-day delivery service.

“Groupon lacks operating profit ... to reinvest in innovation to counteract the platform strength of Google, Facebook, Amazon, etc.,” Sheridan said in a Wednesday note.

Considering these factors, UBS maintained a Sell rating on the stock and lowered its price target from $3.65 to $2.85. The firm also decreased second-quarter revenue estimates from $754 million to $669 million and lowered earnings per share from zero to negative $0.02. Amidst heightened competition, we see Groupon's ability to earn sufficient returns on marketing spend as the crucial element for a turnaround — albeit entailing a high degree of difficulty, in our view,” Sheridan said.

The Unseemly Precedent

A number of first-quarter results justified Sheridan’s thesis: a 5-percent drop in year-over-year revenue, a 62-percent deceleration in North American active customer growth, underwhelming gross billings and a 12-percent decline in international growth profits.

Nonetheless, the analyst was encouraged by successful pullouts from unprofitable international markets, geographic consolidation, positive feedback on a voucher-free redemption processes and beats in earnings before interest, tax, depreciation and amortization.

“We remain cautious on the company's ability to balance marketing investments versus sustained North American customer and gross profit growth and will continue to examine Groupon's operating performance for signs of any sustainable momentum after the country footprint reset,” Sheridan said.

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