Groupon Inc (NASDAQ:GRPN) has received a key upgrade from analysts at RBC Capital Markets. They upgraded the company’s stock from Underperform to Sector Perform and bumped up their price target from $5 to $6 per share. In a research note dated Sept. 2, 2014, analysts Mark S. Mahaney and Rohit Kulkarni and their team cite a number of reasons for their upgrade and price target increase.
Why they downgraded Groupon previously
The RBC Capital team downgraded Groupon just months ago, back in February. They named several concerns at that time. For example, they didn’t think the daily deals giant deserved a premium multiple because of the expected 5% decline in EBITDA this year. In addition, the company was seeing “anemic growth” in its North America Local Billings. For three quarters in a row, Groupon reported a year over year growth rate that was less than 2%.
In addition, they thought the company’s goal of becoming the “starting point for Mobile Commerce” to be too ambitious. They also thought that goal undermined Groupon’s potential to win in the Local Commerce and Services market.
Groupon shows signs of turnaround
The RBC team notes a number of changes since their downgrade in February. For example, they note that the company’s stock has “corrected dramatically.” Shares have fallen 43% this year, although they did recover by 16% since their trough after the company’s second quarter earnings report.
And in addition to the correction in share price, they also note that Wall Street has corrected its estimates “dramatically.” Analysts, on average, have now cut their 2014 EBITDA estimates by 32% this year so far, bringing the consensus estimate down to $270 million. The analysts say Groupon’s valuation is now more reasonable, down from 17 times EV / EBITDA to 11 times 2015 EV / EBITDA.
They also believe Groupon has made progress in the three operating goals it set for itself. In other words, they say the bar has been lowered and that going forward, they see earnings per share catalysts as being “equally weighted positive and negative” right now.
In spite of the progress, however, the RBC Capital team is still skeptical of Groupon’s long-term execution, particularly for expansion into the Travel and Goods segments. Both are extremely competitive. They do think the company will continue making progress in its initiatives in the near term though.