Groupon (GRPN) is Actually Upgraded by Evercore Partners

Groupon Inc (NASDAQ:GRPN) was upgraded by Evercore Partners Inc. (NYSE:EVR) yesterday. The firm states that Groupon Inc (NASDAQ:GRPN) is only trading at 10x 2013 EBITDA estimates. They are bullish on growth and seem unconcerned about accounting issues. Evercore notes that Groupon now trades just 15% higher than the reported $6 billion offer made by Google. However, who says Google made a good offer? Google made a great acqusition with Ebay, but tech firms many times overpay for them.

Furthermore, the company’s S-1 and IPO have brought a lot more issues to public scrutinity, which were previously unknown.

The author of this post has no position in Groupon, but hopes the shares rally on this report, as he considers this stock to be an excellent short, based on no moat, over-valuation, accounting issues and more.

We have nothing against Evercore, they are much smarter than us. Additionally only two firms have a sell on the stock!!

Below is a chart from Fidelity of analyst opinions on the company:

Firm / Aggregate OpinionClick name for performanceOpinion1 Year HistoryClick line for detailsStarMine Relative Accuracy DateOpinionLatest Report
Raymond James

Neutral
10001/31/12Market PerformN/A
William Blair & Company

Outperform
9112/14/11OutperformN/A
Merrill Lynch

Neutral
8404/02/12NeutralN/A
RBC Capital Markets

Neutral
7712/14/11Sector PerformN/A
Credit Suisse

Neutral
7404/02/12NeutralN/A
Susquehanna Financial

Neutral
7111/07/11NeutralN/A
Thomson Reuters/Verus (i)

Sell
6804/19/12Sell04/23/12
Deutsche Bank

Neutral
5704/02/12HoldN/A
Morgan Stanley

Neutral
5512/14/11Equal-Weight (E)N/A
Ned Davis Research (i)

Neutral
3704/16/12Neutral04/22/12
SunTrust Robinson Humphrey

Neutral
3604/12/12NeutralN/A
Zacks Investment Research, Inc (i)

Neutral
2904/20/12Hold04/24/12
Stifel Nicolaus

Sell
2404/02/12SellN/A
Citigroup Investment Research

Neutral
2212/14/11NeutralN/A
Goldman Sachs

Buy
1004/02/12BuyN/A
JP Morgan

Neutral
804/02/12NeutralN/A

Below are some highlights from Evercore followed by the full presentation.

Upgrading Groupon to Overweight despite growing investor concern with regards to impending lock-up expirations, the potential for writedowns internationally, and fundamental concerns. Upgrade based on valuation, assessment of June 1st lock-ups, International traction, and broader fundamentals.

  •  Attractive entry: At $11 per share, Groupon trades at 10x our 2013 EBITDA estimates, roughly half the multiple that was reportedly offered by Google in December 2010, in which time Groupon tripled its quarterly revenues to $492 million from $172 million, expanded CSOI margins from -83% to 4%, and grew the number of international markets to 48 from 34.
  •  Lock-up expirations likely manageable. The top 5 holders constitute 50% of shares, and we estimate less than 10% of shares to be held by mid-level employees, whom we view as constituting the bulk of the employee overhang risk. We view public “float” increasing from 6% to ~20% on June 1st when lockups expire.
  • Potential for international writedowns unfounded. Given that Groupon’s int’l business is showing strong revenue growth and margin improvement, we view risk of a write-down to its business as unlikely, in spite of investor concern that the pace of Groupon’s expansion abroad, coupled with audit revisions in the U.S., could lead to a writedown of its $167mm goodwill. We disagree.
  • Fundamentals intact. The company’s current revenue guidance (reiterated) suggests 79% y/y (or 93% proforma x-Accrual change) at the mid-point, which remains impressive, in our view. Nevertheless, for conservatism, we are reducing our expectation for hyper-local mobile deals (GrouponNow!) and adding additional acquisition-related expenses, hence reducing estimates and target price to $15 from $20, or ~36% upside from recent close.

Groupon’s stock has slid 39%, roughly 44% below where the company priced its IPO on November 4th, since Groupon filed a 4Q11 restatement on March 30th and an audit determination of “material weakness” was revealed to the SEC. In addition, growing investor concern with regards to impending lock-up expirations, the potential for writedowns Internationally, stemming from Marc Samwer’s departure, and fundamental questions, particularly around mobile and other products, persist. Despite these overhang factors, four reasons lead us to see a buying opportunity:

  • Attractive Valuation: At $11 per share, Groupon trades at 10x our 2013 EBITDA estimates. In addition, Groupon now trades just 15% higher than the reported $6 billion offer made by Google for the company in December 2010, in which time Groupon tripled its quarterly revenues to $492 million from $172 million, expanded CSOI margins from -83% to 4%, and grew the number of international markets to 48 from 34.
  • Lock-up expirations represent smaller overhang than anticipated. As we believe the top 5 holders, which constitute about 50% of ownership, will demonstrate restraint when these lockups expire June 1st to await a better exit opportunity, we view lock-up concerns as overstated. Based on our estimates, we see the public float on Groupon shares increasing from 6% of shares outstanding to ~20% as we estimate less than 10% of shares outstanding to be held by mid-level employees, whom we view as constituting the bulk of the employee overhang risk.

Evercore GRPN