Groupon Inc (NASDAQ:GRPN) has transformed from a “push” daily deal email platform to a local service and merchandise “pull” marketplace. The consumers get to search for local deals that do not expire, adding value to those consumers who want good prices, says a report from William Blair by analysts Ralph Schackart and Ryan Domyancic.Groupon

Analysts have built a profitability model (two scenarios) based on Groupon releases and their estimates. The model has been made for three different business segments: Local, Goods and Travel, and Others. Analysts have estimated the operating expenses in all three segments.

First scenario, based on 2014 estimates

In the first Scenario, which is based on 2014 published estimates and implies an $18.96 stock price, the Goods segment is expected to post a loss before interest, taxes, depreciation and amortization in 2014 because Groupon Inc (NASDAQ:GRPN) needs to invest further to enhance the product shipping and fulfillment. Goods are not contributing in the sum-of-the-parts framework.

For the Local segment, analysts expect revenue of $1.4 billion in 2014 and EBITDA margin of 30 percent. Assigning 28.6 times comparable company EBITDA multiple, the Local business accounts for $17.80 (93.9 percent) of the share price in the analysis, according to analysts.

The remainder of the share price, $1.16 (6.1% percent), is accounted by the company’s Travel and Other segment and net cash.

Second scenario, “optimal” long-term target margins

In the second scenario based on our 2014 billings estimate, analysts assume “optimal” long-term target margins. The stock price is expected to be $25.15. Analysts noted that though Groupon Inc (NASDAQ:GRPN) will not hit target margins in 2014, they have used it for a bull case scenario.

The Goods segment at Groupon posts around 13 percent EBITDA margins as the fulfillment process becomes equally efficient as compared to other e-commerce companies. The Goods business accounts for $3.27 of the share price.

EBITDA enhances slightly better for the Local segment and accounts for $20.11 or 80 percent of the share price.

Again, the remaining $1.78 (7.0 percent) of the share price is contributed by the company’s Travel and Other segment and net cash.

Groupon changed strategy for local businesses

Analysts feel that Local and Goods businesses differ in terms of profitability and growth, and investors should value these businesses on a separate basis. Additionally, Groupon has surged its Goods business from the non-existent status during its IPO to 65th ranked 2013 Internet retailer.

According to analysts, management has made substantial changes in the Local business for success in domestic as well as international areas. The changes in the strategy include a shift from push to pull, focus on mobile and subsequent impressive North America adoption rates and one playbook initiative.

 William Blair Analysts have assigned a Market Perform rating to Groupon Inc (NASDAQ:GRPN).