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8 Jul

Groupon, A 2-Bagger-Plus Potential

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After dropping 55% during the first four months of trading of 2014, the share price of Groupon (GRPN) has staged a 28.7% comeback from the May 7 low of $5.18.  But the stock still trades below its 200-day exponential moving average (EMA), dropping below the EMA in mid-February due to disappointing earnings.

But where to now for GRPN?

Jason Bond suggests that Groupon is on the mend, as it transitions its business model toward mobile/local marketplaces.  Not unlike Zynga (ZNGA) – one of our favorite stocks to trade – Groupon is retooling and reinventing itself into a long-term real player in the social space.  Trading at a Price-to-Sales ratio of 1.62, a successful turnaround at Groupon could provide some heft rallies and spikes back up to the company’s initial public offering (IPO) price level of $30, over time.

grpn1But for now, traders are focusing upon the $10 level as a price target.  And if achieved, sentiment in the stock could turn from sour to a the latest hot play for momentum traders.  That’s the scenario Piper Jaffray analyst Gene Munster envisions, whose forecast for a $16 share price would take GRPN to its second major resistance level (according to the chart), with indications of $16 as the next test for the bulls.  And that $16 forecast calculates to a 2-bagger-plus from today’s lowly $6.67 share price.

We agree with Piper Jaffray, in that Groupon’s transition to a business model that offers deals at the local level (mobile), from the company’s original model of timed daily deals, is working for the company.

The number of deals on Groupon’s network has soared to approximately 200,000, from approximately 140,000 in December.  We expect Groupon to reach more than 500,000 deals by the end of 2017 or mid-2018 – or between a 25.8% and 36% CAGR.

The negative impacts of the Groupon’s transition haven’t outweighed the positives.  Though redemptions are up, the number of customers searching for deals has ratcheted up to 9% of revenue, from 6% three quarters prior.

“Searchers,” as co-founder and CEO Eric Lefkofsky calls them, spend more money and more often.  That’s a trend (if continued) that will most likely raise the top line substantially during the three-to-four year time frame in which the company intends to throw-off meaningful earnings.

As far as the negative impacts to revenue -redemptions – Lefkofsky sees them “leveling” off.

“And when we see them leveling, we know we kind of – well, we believe we’ve hit the bottom,” Lefkofsky stated in the latest conference call to investors.  “So as soon as the benefit from people who search and they spend more and their lifetime value is greater, as soon as those benefits outweigh the negatives, we expect to see a lift, and we’re seeing those trends today.”

Lefkofsky goes on to state that he expects the “Local” business to re-accelerate in the second half of the year, delivering “double-digit growth in Local toward the end of the year.”

Of course, “Local” is synonymous with “mobile.”  There, Groupon is gaining serious traction.  In March, Groupon’s mobile business spiked 400 basis points (4%) to 54% of total transactions.

In addition, more than 10 million potential consumers downloaded the Groupon app, increasing the total apps downloaded to more than 80 million.  In the first quarter, more than 6.9 million mobile customers were added to Groupon’s customer list.  Excluding acquisitions, 1.3 million customers were added.

Conclusion

Groupon’s turnaround story has not resonated yet with most investors.  We believe that when Q2 earnings are released, Lefkofsky’s targeted revenue-driving metrics will again show improvement.  So, instead of gapping drops to the share price, investors could be in for gapping up prices, as more investors become true believers in Groupon.  We anticipate more surprises to the upside than to the downside.

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