Groupon Hit With Underperform Rating At Cowen, Firm Sees Uncertainty On Horizon

• Groupon Inc GRPN shares have plummeted 55 percent year-to-date, and are trading close to the lower-end of their 52-week range of $3.17 - $8.43.
• Cowen’s Kevin Kopelman initiated coverage of the company with an Underperform rating and a price target of $2.75.
• While the marketplace seems to have reached its peak, Groupon’s investment in a highly competitive food delivery segment causes concerns, Kopelman stated.

Analyst Kevin Kopelman mentioned that although Groupon continues to record high billings, its operating margins are contracting. Recent growth figures indicate that the markets in which Groupon operates have peaked, he added.

While growth in LTM active customers decelerated from about 18 percent in 2Q14 to about 10 percent in 2Q15, growth in the EMEA region remained in single digits, the Cowen report stated. The company’s target markets in the rest of the world are shrinking, despite 100 percent growth in deal products on the site and 86 percent growth in Groupon-funded discounts, Kopelman pointed out.

The analyst believes that Groupon will find it difficult to grow in the highly competitive food delivery segment, unless it makes heavy investments. The company’s $1.1 billion cash is expected to be partially offset by its $700 million merchant payables balance.

The company may face significant challenges in reversing the decline in its operating margins. Kopelman added, “While Groupon’s planned layoff of 1,100 employees (10% of headcount) should help with SG&A in FY16-17, we do not expect it to change the underlying gross margin downtrend.”

While Groupon may eventually be a turnaround candidate, its shares appear expensive in view of its core EPS of about $0.10, the report said.