Wunderlich Securities is initiating coverage of Groupon Inc (NASDAQ:GRPN) with a Buy rating and $11 price target. They believe the company’s challenges, which include an evolving strategy and the lack of a permanent CEO, has left the stock undervalued, given the  opportunities  the  company  can  address.  They view  Groupon Inc (NASDAQ:GRPN)  as  a  marketing company for local businesses that has been transitioning away from the daily deals business model that it became famous for.


Wunderlich believes its shift to offering a deal bank of discounted goods and services to browse through is a more valuable revenue stream and a better value to its consumers, local merchants, and goods providers. While the company must execute on its pull and mobile strategies and improve its international operations, they believe the opportunities outweigh the risks.

Plenty of Opportunity in Market Size and Penetration

The company had 41.7 million active customers at the end of Q1, compared to  over  200  million  active  customer  accounts  on  the  largest  e-commerce platform, Amazon. While they don’t expect Groupon to attract as many customers as Amazon, they do believe there is room for plenty of overlap of customers between the two and that Groupon Inc (NASDAQ:GRPN) has substantial room to grow its  active  customer  base.  While  growth  has  slowed  from  its  rapid  pace, especially in the international markets, they estimate the company can grow its customer base ~10% this year.


Growth Shifting  to  Online  and  Mobile  E-commerce

Groupon Inc (NASDAQ:GRPN) has seen mobile transactions grow from ~25 percent of the total in North America in Q411 to ~45% in Q113 and they expect the company to be well positioned to be a predominantly mobile company in the future. The company would not disclose the international mobile mix except to say that it is lower and growing at a faster rate. The company currently had over ~7 million app downloads in Q1 alone, has had over 40 million app downloads in total, and has its app available on all major mobile platforms. The company has seen mobile users spend ~50 percent more from their mobile devices than they did by desktop,  which  could  imply  some  organic  growth  from  a  further  shift from  desktop  to  mobile  transactions.  Transactions  are  monetized  with  the same economics on mobile as they are on the desktop and they expect Groupon Inc (NASDAQ:GRPN) to  be  a  prime  beneficiary  from  the  growing  shift  to  online  and  mobile  e-commerce.


 International  Improving

The  international  business  grew  to  46  countries through frenetic expansion both organically and acquisitively. The company is finally in the process of streamlining and integrating operations across the disparate  systems and countries through its  “One  Playbook”  initiative.  They believe  the  opportunity to  buy discounted  goods  via  mobile  devices  should continue to resonate well with many international consumers and the company’s efforts to integrate its overseas operations should help operating margins trend higher.

Groupon Still a Value

While  the  company’s vision to become  an  operating  system  for  local commerce may  still  be  a distant reality, Wunderlich believes Groupon Inc (NASDAQ:GRPN) has taken steps to become a much more valuable and practical local e-commerce player. While shares have been rebounding, they believe the company should be worth $11 per share, which implies a market cap of  $5.8 billion and an EV/S of  1.6x based on their FY14 sales estimate of $2.84 billion.