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Is Groupon (GRPN) Stock's Place in Your Portfolio Justified?

Shares of Groupon Inc. GRPN have returned approximately 5.8% in the past one month, substantially outperforming the industry’s rally of 1.5%. Meanwhile, the S&P 500 index has witnessed a decline of 3.4%.

In the last reported quarter, Groupon recorded a positive earnings surprise of 33.3%. The company has a long-term expected EPS growth rate of 3%.

Let’s delve deeper and analyze the factors driving Groupon’s performance.

Key Catalysts

Groupon raised the bar of its marketplace platform with the recent distribution partnership agreement with AMC Entertainment Holdings, Inc.

AMC’s strong presence in North America will aid the company to focus on expanding its presence primarily in the local markets. With the partnership, Groupon marketplace intends to provide its customers with better access to movies by means of AMC’s numerous screens and theaters across the United States.

Management noted that its new offering Groupon+ is being well received as the company is enhancing customer experience by investing in voucherless initiatives. During the last reported quarter, the company had around 5.9 million cards linked in Groupon+. This is expected to be a catalyst going ahead.

The company’s partnership with Grubhub GRUB continues to enable customers to order food delivery from more than 80,000 restaurant partners of Grubhub via Groupon platform.

Further, partnerships with CoreSource, American Express, Major League Baseball, among others are aiding Groupon to cater to just about any local need, in turn aiding it to rapidly penetrate the market.

The company recently entered into an extended strategic relationship with MLBAM’s privately owned subsidiary, Tickets.com. Per the partnership, Groupon will be able to provide improved ticketing experiences to major ticketing clients of Tickets.com.

With a proper mix of products and accelerating consumer activities, management anticipates growth going forward.

Additionally, Groupon is rapidly penetrating the market driven by collaborations with Gold Star, Expedia, Live Nation, Viator and Fanxchange, which are helping it to cater to just about any local need. The company’s acquisition of Vouchercloud is also anticipated to bolster the international coupon business.

From a valuation perspective, the stock looks attractive as it currently trades significantly lower than the industry average based on a forward earnings estimate. This signifies huge upward potential. Groupon currently trades at a forward P/E of 13.7x compared with the industry group average of 51.5x.

Q3 Results

Groupon reported mixed third-quarter 2018 results. The company delivered non-GAAP earnings of 4 cents per share, which beat the Zacks Consensus Estimate by a penny. Further, the figure increased from 1 cent reported in the year-ago period.

Revenues of $592.9 million declined 7% on a year-over-year basis (6% at FX neutral), lagging the Zacks Consensus Estimate of $603 million. The year-over-year decline can primarily be attributed to lower customer traffic.

Risks Persist

The company has been trying to reduce dependence on goods deals and is shifting focus toward local services market. The transition to high margined local services market is hurting revenues. Further, intensifying competition amid increased uncertainty remain headwinds.

Our Take

We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Consequently, we suggest that investors hold on to the stock for the time being.

Zacks Rank & Stocks to Consider

Currently, Groupon has a Zacks Rank #3 (Hold).

Few better-ranked stocks in the broader technology sector are Upland Software UPLD and Twitter, Inc. TWTR, both flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Upland Software and Twitter is currently pegged at 20% and 22.1%, respectively.

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