Groupon seems to be recovering some positive sentiment on Wall Street. Short interest in the daily deals giant plunged 5.9% earlier this month, and analysts believe things could finally be looking up for it.

Groupon Inc (GRPN): Possibility Of Great Upside Seen

Groupon could beat expectations

In a report dated March 27, Trefis analysts suggested that Groupon may be positioned to return better-than-expected results. Management is targeting 20% revenue growth and 25% adjusted EBITDA growth by 2017, which sounds like a tall order. Nonetheless, the Trefis team thinks Groupon can achieve these growth rates—and potentially surpass them.

To achieve its goals, Groupon must add more merchants to its network and continue pushing toward marketing strategies that are not based on email. If either strategy proves to be more successful than expected, the Trefis sees upside potential to Groupon shares.

Groupon must increase merchant count 30%

The analysts point out that Groupon is focusing on expanding its merchant count and deal inventory. So far, the company has only grabbed about 2% of its target merchant market in its core categories. Since Groupon began, more than 800,000 merchants have been featured on the platform.

Based on these numbers, the Trefis team estimates that the total merchant opportunity is more than 40 million. Further, they say Groupon must increase its merchant count to 1.3 million or by 30% in order to be successful in this part of its strategy.

Groupon expands features

The company has been adding more features to help with the strategy, making it possible for customers to follow merchants, ask for deals and request appointments. Groupon has also been adding more useful information like contact info for merchants in addition to reviews and maps of their location. In the next few months, Groupon expects to add 7 million more pages along these lines.

The company also recently unveiled its G.Nome operating system to offer other features like analytics, seamless redemption and item-level sales. Also merchants get real-time access to Groupon’s system, and the company cut its take rate for bigger merchants in order to improve the quality of the deals offered through its marketplace.

If Groupon can more than triple merchant count…

Trefis analysts note that Groupon’s overall billings were 7.58 billion last year with about 300,000 active merchants. They estimate that average gross billings per merchant were around $25,000. If estimating long term average gross billings per active merchant to be around $16,500, they say Groupon could triple its merchant count to around 900,000 active merchants.

Their price target is $8.01 per share, and if Groupon can expand its active merchant count to more than 1.3 million by the end of their review period, then they see a more than 30% upside to their price estimate.

They see this as being possible because Groupon has been seeing its subscriber growth rise quickly, which makes the platform more attractive to merchants. Also they want to see the daily deals giant introduce more “innovative deal categories” that will make it easier for merchants to sell their unsold inventory. They also suggest that more competition could result in a “more than anticipated reduction in take rates.”

Groupon must raise visitors 20%

The Trefis team also said Groupon must increase the number of monthly unique visitors to 450 million, which would be a 20% increase from where it is right now. They think this is possible, noting that the company has made progress in transitioning away from an email-based strategy to a non-email strategy.

Groupon’s North American Local business saw its email share fall from 48% in the fourth quarter of 2011 to 22% in the third quarter of 2014. Meanwhile the company’s non-email business now contributes 78% of its billings, compared to 52% previously. Groupon is also making progress in pulling in customers through search, with its North American transaction share rising from 9% in the third quarter of 2013 to 24% in the third quarter of 2014.

Groupon sees $47 in billings per user

Groupon had about 150 million unique monthly visitors last year and recorded $7.58 billion in gross billings on those visitors. That amounts to about $47 per visitor. The Trefis expects this to fall to about $40 in the long run as Groupon enjoys international expansion, and spending outside the U.S. tends to be lower.

As a result, they expect Groupon to see its monthly unique visitor count pass 370 million by the end of their forecast time frame. If the company can grow this metric to 450 million by 2021, then they say it will increase its value by more than 20%. They see this as being possible because Groupon seems to be getting more popular.

Also success with Groupon Pages should result in more people searching its site and better merchant quality should make the platform stickier.

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