Groupon: Potentially a Great Deal
On Wednesday morning, the major investment houses put out their ratings on Groupon (NASDAQ: GRPN). If you would like to be alerted to Groupon updates as they come out in real-time, signup for a free trial of Benzinga Pro's premium news service.
Goldman Sachs seemed to be the most kind, rating GRPN at Buy with a $29 price target. On the research report, GS said that, “We view Groupon as the key to unlocking the massive local advertising market with which the Internet has long struggled. We believe the size of the addressable market (conservatively the $100 bn local advertising market, but potentially over $10 trillion in global advertising, goods, and services markets), new business models like Groupon Now! In mobile, and the advantages of scale more than offset the considerable risks from competition, margin pressure, and deal fatigue.”
Citi, on the other hand, joked that it was “waiting for a better deal”, while rating it Neutral with a $24 price target. “We believe the company's momentum in its core Daily Deals segment is likely sustainable,” said they. “However, we believe material upside valuation from here requires success in new segments (Groupon Now, Groupon Rewards, Getaways, Live, Goods, etc…) that we believe could take significant time to prove out.”
J.P. Morgan was similarly unenthusiastic when rating at Neutral with a $24 price target. “We believe Groupon is well-positioned to take share of local leisure, recreation and foodservice markets, which combined represent an estimated $5.3T in sales globally and $1.4T in the US. As subscriber growth slows, we project a major profitability ramp for Groupon over the next two years. However, we believe this ramp is largely anticipated and its magnitude leaves little room for error in execution and operations at current levels.”
In other words, it seems as though GRPN is a victim of its own success in some quarters. “The company has done well, but who knows if they can keep it up?” is a popular opnion.
The New York Times pondered the idea that many of the banks were reluctant to rate GRPN at Buy, Goldman Sachs an obvious exception.
“Analysts echoed the longstanding concerns about Groupon, including competitive pressures, the unproven business model and limited upside opportunity,” wrote Evelyn Rusli for the NY Times. “Critics, in part, are skeptical that Groupon can sustain its aggressive growth trajectory. The company recorded revenue of $1.1 billion for the first nine months of the year, but also splurged on online advertising, spending about $613 million on marketing in that period.”
Rusli is echoing our thoughts that GRPN is a victim of its own success. Still, with so many of the banks behaving so bearishly traders may well look towards similarly web-minded companies like LinkedIn (NASDAQ: LNKD), Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN).
Traders who believe that Groupon is well capable of marching aggressively forward might want to consider the following trades:
- 2011 has been such an impressive year for GRPN, why would it slow down now?
- Lightbank does not know how to back a lame horse
- The product is strong and still incredibly popular
Traders who believe that Groupon will inevitably slow down now may consider alternative positions:
- LinkedIn is still a good bet, though some analysts believe that bubble is set to burst.
- Google keeps expanding its business, and still appears safe
- Likewise Amazon, who seem to be doing well with the Kindle
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