Groupon's Path To Growth Still Unclear, Says Morgan Stanley

• Shares of Groupon Inc GRPN have plummeted 27 percent year to date, and are currently trading close to their 52-week low of $2.15.
• Morgan Stanley’s Dean J. Prissman maintained an Equal-weight rating on the company, with a price target of $3.
• Although Groupon is taking steps to boost its profitability, the ROI in its incremental investment is unclear, Prissman stated.

Groupon’s 4Q15 results indicate stability, particularly in North America. The region’s local gross billings and gross profits grew 6 percent year on year and 8 percent year on year, respectively, while gross profits in the EMEA declined 14 percent year on year due to lower than expected billings.

The company’s total revenues for the quarter were 6 percent above the high end of its guidance and 8 percent higher than the consensus expectations. Groupon‘s adjusted EBITDA was 12 percent above the high end of its guidance.

The company maintained its 2016 revenue guidance of $2.75-3.05 billion, but raised its adjusted EBITDA guidance from $75-$125 million to $85-$130 million.

Groupon is on track to executing its planned investment of $150-$200 million in marketing, while de-emphasizing lower margin shopping categories and flattening international operations.

Analyst Dean J Prissmna mentioned, “In our view, de-emphasizing lower margin businesses makes sense, however the ROI on the incremental investment in marketing remains unclear.”

The analyst believes that Groupon’s decision to favor marketing spend instead of order discounting may aid gross profit but not necessarily operating profit.

The revenue estimates for 2016 and 2017 have been reduced by 2 percent and 3 percent, respectively.