The Key Downside Scenarios For Groupon’s Stock

Groupon‘s (NASDAQ:GRPN) stock has tumbled by more than 65% year to date, owing to weak financial results and an uncertain future outlook. The recent changes in its top leadership, coupled with drastic changes in strategy, have added to doubts regarding the sustainability of the company’s business model. Our $4.20 price estimate for Groupon represents significant premium to the current market price, as we think the market is presently factoring in a high degree of pessimism and that the recent strategy changes (if executed properly) could lead to recovery in Groupon’s business. Nevertheless, the high level of uncertainty makes certain scenarios plausible that could lead to huge swings in its stock price. Specifically, we think less-than-anticipated success in developed geographies and a failure to improve bottom-line results represent certain scenarios that could trigger stock price changes for worse.

Check out our complete analysis of Groupon

North American And EMEA Revenues Rise Only Marginally Over Our Forecast Horizon (-30%)

In our present valuation model, we have forecast Groupon’s revenue within North America and EMEA region (overall) to rise at 6% annually during 2014-2022. This is based on the assumption that Groupon’s move to enhance sales and marketing efforts and to popularize its pull-marketplace will lead to an increase in active customers and average billing per active customer over our forecast period. This, as we believe the company’s efforts to prioritize the mobile platform and move from a push to pull model, along with significant increase in merchants and inventory, could lead to moderate growth in customer demand over our forecast horizon.

However, a scenario wherein Groupon’s net revenue in North America and EMEA increases only marginally by 1% CAGR over 2014-2022 will take our price estimate around 30% lower to $3.10 per share. We’d like to note that this bear case scenario still results in a price estimate, which is 10% higher than the current market price. This scenario is plausible because of the following factors:  1) if Groupon’s business model continues to lose popularity over our forecast period, and the management is unable to launch innovative offerings; 2) the company’s exit from more-than-expected markets and geographies (across both developed and developing countries) could lower growth prospects; 3) if Groupon is unable to keep up with the rapid rise in competition in the industry, then its demand will further weaken; and, 4) if Groupon’s efforts to broaden its appeal to high-quality merchants lead to continued contraction in take rates for the company.

Trefis Adjusted EBITDA Margin Stays At Around 4-5% Over Our Forecast Horizon (-25%)

We estimate Groupon’s EBITDA margin (in Trefis adjusted terms) to decline from 7.9% in 2014 to 4.3% in 2015 due to a decrease in gross profits and increase in marketing expenses. The slowdown in top-line will also weigh on margins in the near term. However, over the longer run, we estimate Groupon’s EBITDA margin to rise to 9% by 2022. This is as we expect the company’s latest efforts to move away from unprofitable businesses (and markets) and to increase the proportion of third-party business to result in higher margins in the future. Moreover, over the long run, we think top-line growth could outpace expense growth as relative maturity in the business model could lead to operating leverage.

However, in the event Groupon’s EBITDA margin persists at around 4-5% over our forecast period, this will result in a 25% decrease in our price estimate to $3.20. This scenario is plausible due to factors such as: 1) if Groupon fails to gain traction with customers, then its marketing expenses could stay elevated for a longer duration; 2) a rapid rise in competition will put pressure on margins; and, 3) a sustained slowdown in top-line growth, coupled with expense growth, will make profitability improvement harder to achieve.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research