Groupon Shares Soar After Morgan Stanley Upgrade

Analysts at Morgan Stanley are taking a bullish view on Groupon GRPN as the stock has slid precipitously from its $20.00 IPO price where the company went public last November. The daily-deals juggernaut closed Friday's trading session at roughly $10.00, marking a 50% decline from its IPO price. On Monday, shares have jumped $1.00 to $11.06, a 10% gain on the session. Morgan Stanley wrote that "Groupon has emerged as the leading local eCommerce company in an industry with significant barriers to scale. Its advantage due to scale (largest merchant and customer base) and technology (8 acquisitions YTD) has enabled it to accelerate NA (North American) revenue growth while improving its margins." Groupon's stock price has been hurt by intense competition in its markets from the likes of Living Social, and a host of other companies, along with a material weakening in investor risk appetite for young, internet-based, publicly traded companies. This phenomenon can be readily seen in Zynga ZNGA and Facebook FB, while LinkedIn LNKD continues to be a bright spot in the market of recent IPOs. The Morgan Stanley analysts, however, see significant upside in Groupon from current levels as evidenced by their $18.00 price target on the stock. In light of the sell-off in the name, valuation has indeed become compelling on a risk/reward basis. Groupon, which essentially created a brand new market and continues to be the "best in breed" player in that market, is trading at a forward P/E of 16.11 and a PEG ratio of 1.69. Although this is a risky stock, it is not too hard to imagine scenarios where GRPN's market cap could grow substantially from its current $7 billion valuation over the next 5 to 10 years. Morgan Stanley cited four catalysts that it believes will drive the share price going forward. "We believe Groupon can i) preserve its competitive position as local eCommerce leader); ii) maintain a ~40% take rate within daily deals segment;) Continue to grow revenue while expanding margins and iv) avoid deal fatigue by continuing to improve targeting and personalization." The firm thinks that in the best case scenario, GRPN shares could trade as high as $30.00 and under its bear case the stock could fall to $8.00. Given that GRPN closed last week at $10.00, Morgan Stanley notes that the risk/reward from current levels is quite compelling.