Groupon: Catalysts Seen Ahead

Groupon Inc (NASDAQ:GRPN) may be a good option for investors looking at the long term, according to analysts at Sterne Agee. They see some catalysts in the company’s future as it struggles to reignite growth. However, they also acknowledge that the execution risks are still very much in play.

What Groupon’s got going for it

In a report dated Sept. 19, 2014, analysts Arvind Bhatia and Brett Strauser point out that Groupon’s Local segment will have easier comparisons starting in the fourth quarter. Also the daily deal company will hold its first-ever investor day in November.

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The Sterne Agee team also sees a possible new near- to medium-term initiative as Groupon to build a review service that’s similar to Yelp Inc (NYSE:YELP)’s service. In addition, they think the company’s valuation makes it look “attractive” for long-term investors.

The analysts note that the big investment theme for Groupon depends entirely on the company’s future in Mobile and Local and where the two segments converge. They remind investors that the company’s long-term goal is to increase gross profits and gross billings with a 20% compound annual growth rate over the next five years.

Looking ahead to Groupon’s goals

In the near term, Groupon is looking to reaccelerate billings growth in its Local segment in North America. The company aims to hit double-digit growth by the fourth quarter of this year. Groupon also wants to see its Goods segment achieve double-digit gross margins by the end of this year. The daily deals company also wants to see the Rest of the World, excluding its Ticket Monster acquisition, hit profitability by the fourth quarter.

The Sterne Agee team reminds investors that Local billings in North America only grew 1.8% year over year in the second quarter. That growth rate was lower than what Wall Street wanted. On the plus side, Groupon saw a 9% gross margin in its Goods segment, marking a 400 basis point quarter over quarter increase. Also the company noted declining losses from the Rest of the World operations, which fell from $25 million to $18 million.

Will Groupon continue to show progress?

The analysts are not yet making any calls about what to expect in Groupon’s third quarter results. However, they’re hoping to see progress on the company’s near-team goals. They think the company’s third quarter results should see a benefit from last year’s Gmail issue, which was caused by Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s addition of the “Promotions” folder. Groupon’s emails were automatically put into that folder, making it more difficult for Gmail users to see them and thus greatly reducing the company’s open rate by double digits sequentially.

Toward the end of the third quarter, the Sterne Agee analysts also note that widespread adoption of Groupon’s Marketplace slowed down its overall growth temporarily. They believe the Marketplace experience is actually better than the company’s previous model, although it removes the urgency in buying a deal.

The analysts think Groupon will be able to hit its growth target of double digits for the Local segment starting in the fourth quarter. They also point out that management’s comments about the trends in the Local segment are still positive.

They continue to rate Groupon as a Buy with a $12 per share price target.