Groupon shares have plunged by more than 50% year to date, and the carnage just keeps getting worse. Analysts are decidedly bearish on the company, and for good reason. Management hasn’t been able to turn it into a sustainable business model, which led to the resignation of founder Andrew Mason as CEO in March 2013.

Investors were excited when the news was announced, but his successor hasn’t been able to succeed where he has failed, so much of Wall Street has given up hope.

Groupon at Underperform

Cowen and Company analysts Kevin Kopelman and Andrew Marok are the latest analysts to start covering Groupon stock, and they initiated coverage of it today with an Underperform rating and $2.75 per share price target. They believe that “eventually,” the daily deals provider might become a “turnaround candidate,” but for now, the fundamentals just don’t look good.

They believe that the marketplace for daily deals might have peaked now, based on Groupon’s growth numbers. The company saw the growth rate of LTM active North American customers decelerate to 10% during the second quarter of this year, amounting to 25 million, compared to 18% growth in last year’s second quarter.

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Also Groupon has not been able to get a handle on Europe, the Middle East and Africa, as the percentage of growth there is still in the single digits. Also growth in the number of active customers in the Rest of the World has fallen to 8 million.

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Groupon’s efforts mattering little

The Cowen team notes that the weak growth rates continue in spite of Groupon’s continued efforts to turn things around. The company has grown the number of deals and products available on its site by 100%, bringing them to 440,000, excluding coupon codes. Also the company recorded an 86% growth rate in Groupon-funded discounts, bringing the metric to $39 million.

Kopelman and Marok think these numbers suggest that the voucher deal market is saturated and that Groupon Shopping is failing to attract customers. Further, the company is still battling “deal fatigue” in email inboxes, which, despite efforts to change this, still account for 30% to 35% of its total billings.

Groupon in food delivery

Groupon management said they’re moving into restaurant food delivery next, the same strategy being followed by other companies in the local internet space, including Uber, Amazon and Yelp. The Cowen team does see an opportunity for incremental monetization in the space, but it’s one that has become extremely competitive.

Companies that are getting into the space are spending heavily on building out their own courier services, which the analysts believe will make it hard for the segment to move the needle much for Groupon without some big-time investments from the firm.

Groupon margins declining too

Another big problem Cowen identified was margins, which have been steadily declining. They think it will be hard for the daily deals firm to reverse this trend, noting that the take rate on voucher deals has fallen to 32%, an 800 basis point decline from 40% three years ago. Groupon has been cutting the rates merchants pay and is paying more for discounts on orders in an attempt to fuel customer growth.

Kopelman and Marok believe the company could have to sacrifice growth in its platform in order to reverse the fall in margins. Further, they note that the Shopping segment now accounts for 35% of overall billings but has a lower gross margin of 11%, compared to 28% for vouchers.

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Management has said they are targeting 15% to 20% margins for the Shopping segment in the long term, but thus far, the analysts say progress has been “choppy.” They note that Groupon has again laid off more employees, which should help with selling, general and administrative expenses over the next two years. However, they don’t expect these layoffs to change the downward margin trend.

Groupon is expensive

The Cowen team is expecting to see adjusted profits of about $70 million in fiscal 2016, excluding the losses expected from the Rest of World business. They’re projecting $320 million in EBITDA for the year, but they see this as being a “poor indicator” of profit because Groupon shells out more than $150 million in stock expenses and records about $100 million in depreciation expenses.

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Shares of Groupon declined as much as 1.28% to $3.78 per share during regular trading hours today.

All graphs/ charts in this article are courtesy Cowen and Company.

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