Groupon shares plunged today following last night’s earnings disappointment. The stock plummeted by as much as 27.42% in extremely heavy trading with more than 71.5 million shares changing hands today. The average daily volume is only 7.67 million shares.
Pipe Jaffray downgrades Groupon
Analyst Gene Munster of Piper Jaffray downgraded Groupon following last night’s report. The company’s revenue of $713.6 million missed Wall Street estimates by 3%, and its fourth quarter revenue guidance missed expectations by 12%. Although the third quarter adjusted EBITDA at $56.3 million was in line with expectations, the fourth quarter guide missed estimates by 50%. And the guidance for 2016 wasn’t any better. The reason for the misses was that management is planning to up spending on marketing.
Munster now rates Groupon at Neutral and has slashed his price target from $7.50 to $2.50 per share. He believes the company should focus more on improving its product and less on marketing, because he doesn’t think increasing marketing will solve the underlying problem of product issues. He added that “standout companies” like Apple, Google, Netflix, Facebook and Amazon “obsess over product experience and rarely focus on marketing.”
BAML downgrades Groupon too
Bank of America Merrill Lynch analysts Paul Bieber and Justin Post downgraded Groupon two notches from Buy to Underperform and cut their price objective from $5.50 to $2.75 per share. They expect sentiment on Groupon to remain negative until it is able to prove that the greater investments in marketing are actually working and driving user growth. They don’t expect this to happen until late next year or sometime in 2017.
Another potential event that could shift sentiment on Groupon slightly more positive is improved performance and profitability in the company’s international business.
B Riley cuts price target
Analyst Sameet Sinha continues to rate Groupon at Neutral but slashed the firm’s price target from $5.50 to $2.50 per share. The analyst thinks it will be difficult for the company to acquire more customers because doing so requires more than spending more on marketing. He sees two other major components of this plan as being the density of deals on the site and also geographic reach.
He noted that Groupon also announced that CEO Eric Lefkofsky is being replaced with Chief Operating Officer Rich Williams, with Lefkofsky returning to the chairman post. The analyst said Williams set forth a plan that is much different than the previous strategy and believes that Groupon “has set itself a very difficult objective,” which he sees as being “further constrained by tremendous competition in ecommerce and in Local.”
Analysts weigh in on Groupon’s new CEO
Williams is the one who plans to up marketing spend, adding between $150 million and $200 million in annual expenses to the company’s budget. He also plans to streamline its international business, focus more on the third-party Goods business, and cut sales of goods with lower margins, which is expected to detract as much as $250 million from the segment’s revenue next year. Based on these objectives, Raymond James analyst Aaron Kessler said he thinks Groupon shares will remain range-bound for now. He continues to rate the company at Market Perform.
Credit Suisse analyst Stephen Ju was one of the first analysts to maintain his price target of $5 per share on Groupon. He remains Neutral-rated on the stock as he waits for results. William Blair analyst Ralph Schackart also maintained his Market Perform rating on Groupon. He thinks it’s possible that the company can speed up its customer acquisition rate with the increase in marketing spend but also believes that it will take some time for investor confidence to be built back up.
Also Groupon management said it could take 12 to 18 months before the new marketing strategy speeds up growth in the long term, meaning that the company will remain in transition mode for quite some time.