UBS analysts Eric J. Sheridan, Vishal J. Patel, and Timothy E. Chiodo stick with their
Netural rating for Groupon Inc (NASDAQ:GRPN), but tweak their estimates to reflect a 2014 projection of higher revenue but lower margins.
We were positive on: a) the traction gained by the EMEA 1P business (revs made a significant contribution, $97mm in Q4 '13 vs. $9.3mm in Q3 '13); b) signs of continued mobile traction (~50% of global transactions via mobile Dec.'13); c) a reacceleration in rev growth (20% YoY in Q4 '13 vs. 5% YoY growth during Q3 '13); & d) the decision to exit China demonstrates management discipline on capital allocation. We were less positive on: a) greater skew toward 1P vs. 3P than we had expected (partly due to seasonality); b) guidance calling for higher levels of marketing investment (i.e., $25mm incremental in Q1 '14, expectations for FY14 EBITDA only slightly above '13 levels) than we had anticipated; & c) weaker than expected ROW results, although TMon is expected to contribute to FY14 billings growth, albeit at a lower take rate (~14% for TMon vs. > 30% for Groupon ROW 3P during 2013).
What To Do With the Stock?
In 2014, we expect Groupon Inc (NASDAQ:GRPN) to continue to make progress in its business transition (i.e., more mobile & "pull" centric) albeit with upward revenue volatility & downward margin volatility. As demonstrated by Q1 guidance, significant investment & execution hurdles remain (i.e., TMon & ideeli integration, marketing to increase awareness of pull, SEO/SEM, a 2nd or even 3rd fulfillment center). While we believe that Groupon Inc (NASDAQ:GRPN) management is executing against the right strategy to create long-term value, we stay on the sidelines given near-medium term margin pressures & execution hurdles.
Estimate Changes – Higher Revenues, Lower Margins
New Q1'14 ests are revs $752mm (from $691mm); Adj. EBTIDA $40.2mm (from $100mm), & Adj. EPS $0.01 loss (from $0.07). Our new FY14 ests are revs $3.28b (from $2.96 b); Adj. EBITDA $300mm (from $395mm), & Adj. EPS $0.17 (from $0.26).
Valuation: Maintain Neutral, Reduce PT to $8.75
New PT is $8.75 (prior: $11), based on a weighted avg approach (EV/Sales, EV/EBITDA, EV/FCF) now applied to '13-'15 ests. The main driver of our reduced PT was lower EBITDA ests, a slower EBITDA CAGR, & a reduced EBITDA multiple.