One lone analyst believes that Groupon has a chance to evolve beyond its current daily deals business.
Sterne Agee’s Arvind Bhatia upgraded Groupon to “buy” from “neutral” this morning, sending the company’s stock up 27 cents, or 5 percent, to $5.56 a share in afternoon trading. At one point in pre-market trading, the stock hit as much as $5.74.
While those gains are significant considering where the shares have been trading for the past few months, the stock overall is still down more than 70 percent since Groupon’s IPO in November.
Bhatia acknowledged how out of sync his upgrade is with the bigger picture: “This is an out-of-consensus upgrade predicated on a more constructive longer-term view of the company,” he wrote in a letter to investors. He also warned that the upgrade was not a reflection of the company’s fourth-quarter results, which are being released on Feb. 27. (Bhatia believes the stock can go as high as $9 over the next 12 months.)
Rather, his thesis is based on the belief that the Chicago company — and therefore its CEO and founder Andrew Mason — can execute on a number of fronts, by turning around its international business and leveraging its mobile commerce foothold. And, even more importantly, he believes that Groupon can evolve beyond its core push business of delivering offers by email to a model where consumers will discover deals on the site through search engines and direct traffic to the site.
In November, I wrote about this evolution to a marketplace approach, which Groupon was rolling out in Chicago and New York. At the time, Jeff Holden, the company’s SVP of Product, explained that Groupon had mastered serendipity by sending offers to people they thought might like them.
But now they are trying to become a destination where people shop for things they already know they are looking to buy. In a handful of markets, consumers can now browse and search a catalog of offers – they don’t disappear after one day. Categories span everything from local deals, including auto, restaurants and spas, to products, like bed linens and pet care.
At the time, Groupon said it had amassed 27,000 deals in North America as part of the company’s new direction. That will be a critical number to watch, since having a lot of inventory will be a crucial component to its success.
Bhatia claims that the benefit to this approach is that the deals can now be marketed effectively through search engines, like Google and Bing, as opposed to sending emails (which people are tiring of). “Currently less than 5 percent of Groupon’s revenue comes from search engine marketing,” he wrote. “In contrast, an estimated 25 percent of queries on search engines are local and 50 percent of mobile searches are for local, which suggests meaningful untapped opportunity.”
Rakesh Agrawal, a business consultant and outspoken critic on Groupon, disagreed with the company’s prospects of using Google and Bing to drive sales going forward. “Search marketing is a much more complicated sell,” he said. “Even if it were successful, the revenue they could generate pales in comparison with what daily deals were throwing off.”
Groupon is expecting fourth-quarter revenue ranging between $625 million and $675 million, an increase of 27 percent to 37 percent, compared with the same period a year earlier. It expects income from operations to be between breakeven and $20 million, compared with a loss of $15 million in the fourth-quarter 2011. Analysts are forecasting a loss of two cents a share.