Was This A Step In The Right Direction For Groupon?

Groupon Inc GRPN reported robust 2Q results, with acceleration in billings growth in the crucial North American Local segment.

Morgan Stanley’s Brian Nowak maintains an Equal-Weight rating on the company, while raising the price target from $3.00 to $4.70.

Nowak prefers to wait for signs of sustained and profitable billings growth into 2017 before becoming more positive on the stock.

Growth Acceleration

The analyst mentioned this was the first time North American Local gross billings growth accelerated for Groupon since 4Q14, accelerating to growth of 8.6 percent year-on-year, as compared to 5.3 percent in 1Q16 and well ahead of the estimate for 2Q.

Related Link: Groupon Upgraded At Piper Jaffray, Says Wall Street Isn't Accounting For New Customers

“This larger gross profit pool drove EBITDA higher despite marketing and SG&A both coming in higher than we expected,” Nowak stated.

Strategic Initiative Paying Off

The analyst attributed the local billings growth acceleration to early success on the company’s strategic initiative to increase investment in marketing, with a new 12–18-month target payback period, as compared to the earlier six-month period.

Outlook

“The strong customer additions the past 2 quarters and billings acceleration leave us encouraged by the progress behind this initiative. We are therefore raising our N. American local billings expectations by 3 percent in 2016 and 5 percent in 2017,” the analyst said.

Headline revenue and EBITDA metrics for 2Q16 were also significantly better than expected. Groupon materially raised its EBITDA guidance for 2016, while also raising its revenue guidance for the year.

Full ratings data available on Benzinga Pro.