Goldman Sachs: Groupon's Economics Are Getting Worse

Analysts at Goldman Sachs hold a bearish view on Groupon Inc (NASDAQ: GRPN) as investors are likely "too optimistic" on the company's growth profile. The firm's Christopher Merwin initiated coverage of Groupon with a Sell rating and $4.70 price target.

Groupon has succeeded in dramatically improving the customer experience through the launch of Groupon Plus, but this doesn't necessarily correlate with an uptick in customer frequency, Merwin commented in a note. Meanwhile, the stock's strong gains of late do assume an uptick in customer frequency that would solve the unit economics challenge, which management is trying to fix.

But the fact is Groupon's improved offerings are still in the "very early days" and investors may be getting ahead of themselves with the stock trading north of $5 per share, especially when factoring in "existential threats" from various competitors, the analyst argued. Also, Groupon faces a similar macro-related headwind as retailers do should retail sales slowdown.

Moreover, investors should expect the unit economics to also stall a potential margin expansion, Merwin highlighted. While Groupon is showing investors leverage in the P&L this is likely due more to SG&A savings than marketing leverage. In addition, the company lengthened the payback period on its marketing spend from just six months to a new range of 12 to 18 months which adds to the challenged unit economics of the business.

The case for selling the stock could be revised for the better if customer frequency metrics show signs of improvements moving forward, the analyst concluded.

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