UBS Downgrades Groupon To Sell, Sees a Lack of Scale

UBS’ Eric J. Sheridan downgraded the rating for Groupon Inc GRPN from Neutral to Sell, while maintaining a price target of $3.20. The analyst said that the pressure on the company’s business was unlikely to ease in the medium term.

Groupon’s shares are currently trading 30 percent above the price target. Analyst Eric Sheridan mentioned that Groupon had exhibited some progress in its transformation to an ecommerce marketplace and in streamlining its international operations.

The analyst added, however, that the company faces a long road ahead in strengthening its position in the local ad market where bigger players are increasing spending to strengthen their positions.

Key Weaknesses

Sheridan believes that Groupon’s near-term margins are likely to be negatively impacted by the company’s marketing spend. Increased competition in goods, a mix shift to a lower-margin IP business and slowing customer and engagement growth are expected to hinder the company’s growth in the near future.

Groupon’s lack of operating scale to drive additional investments in innovation to counter the platform strength of bigger players remains a concern area. Sheridan stated, “On operating profit (using the definition of EBITDA – Stock Based Comp – Capex for the purpose of this report), Groupon generates a cumulative $5mm loss over the 2016-2020 timeframe.”

The company is expected to report FY16 revenues of $2.99 billion and adjusted EBITDA of $108 million.