Sterne Agee upgraded Groupon Inc (NASDAQ:GRPN) from Neutral to Buy and announced a $9.00 price target in a recent report. As quoted from the report:
This is an out-of-consensus upgrade predicated on a more constructive longer-term view of the company and is not a call on the company’s upcoming 4Q results. We recognize that meaningful risks remain, the stock will be volatile and we may be a bit early. However, we believe the risks are well known and largely priced in. The stock is trading at ~an 80%/60% discount to its peers based on 2014E EV/Sales and EV/EBITDA bases, respectively.
The commonly accepted belief that is reflected in Groupon’s stock valuation is that the company has a weak business model with very low competitive barriers. In this article, while I address the quite-justified concerns of the bears, I also offer a counterargument for the long-term viability of the company going forward.
Groupon Has a Weak Business Model with Low Competitive Barriers?
Good technology companies are characterized by high margins, scalability and a wide moat around their business model. Are these features missing in Groupon? Bears argue that the company spends almost nothing on R&D, has few patents to its name, and scalability is almost non-existent.
Another concern from bears is that the company’s business of selling discount deals has almost no competitive barriers. It requires no advanced technology and very little expenditure to start a daily deals website. The company faces steep competition from strong competitors like LivingSocial, AmazonLocal, and Google Offers.
The concerns for the bears are quite justified. That being said, the company has taken some solid steps, as mentioned below, in the last couple of months to improve margin and scalability. As far as the competitive barriers are concerned, I feel Groupon’s recent acquisitions and partnerships will help the company transform itself into a viable long-term business.
Groupon Seems to be Going in the Right Direction
- Last year Groupon CEO Andrew Mason set his company a goal of adding more value and diversity to its business in daily deals. Groupon recently launched Groupon Payments, offering merchants a way to accept credit cards at guaranteed lowest rates, for both iOS and Android devices.
- The company acquired CommerceInterface, a leading provider of web-based channel management technology that helps manufacturers, distributors, and retailers succeed at managing their businesses and selling online.
- Groupon announced a partnership with Broadway Inbound, the business-to-business ticketing platform, for all Telecharge Broadway and Off-Broadway events. Via the arrangement, GrouponLive, Groupon’s live entertainment division, gains the ability to process customers orders through the Broadway Inbound system, granting subscribers access to special ticket prices for top Broadway and Off-Broadway musicals, plays and concerts.
- And most recently TechCrunch reported that Groupon also acquired Y Combinator Company Glassmap, a location-aware app that will help find what is interesting and relevant in nearby locations.
