Groupon is down 9% today and one of the reasons its tanking is Evercore’s Ken Sena cut his price target to $3 from $6.50 and rated the stock “underweight.”Here are his bullet point take aways:
- Reducing our target price from $6.50 to $3.00 and dropping our rating to Underweight.While this rating change may appear late given the stock’s recent decline, we caution the following: 2013 EBITDA estimates for Street remain too high. Our estimate for 2013 EBITDA of $260 mm sits ~$200 mm below the recently revised Street consensus of $470 mm. We see potential for future cash burn assuming billings declines persist as the deteriorating impact on “changes in accrued payables” could be enough to offset growth in income earned
- 2013 EBITDA estimates for Street remain too high. Our estimate for 2013 EBITDA of $260 mm sits ~$200 mm below the recently revised Street consensus of $470 mm.
- We see potential for future cash burn assuming billings declines persist as the deteriorating impact on “changes in accrued payables” could be enough to offset growth in income earned
- This work follows our July 26th report in which we argued that until greater disclosure of Groupon’s “first-party” Goods business (where Groupon books items “gross” vs. “net”) is made clear or until the correlation between billings performance and negative third-party checks proves inaccurate, caution in the name is needed. We believe both of these concerns were validated on the company’s 2Q12 earnings call.
- Reducing OCF Assumptions. Specifically, our operating cash flow growth reduces from 21% CAGR to -1% CAGR, as we expect growth in net income to largely be offset by an unwinding of its working capital benefit. However, we note this reduction also reflects lowered revenue and income assumptions.
- Reducing L/T “take-rate.” With its new disclosure of 1P Goods revenues, which carry 100% take, we revisited our take-rate assumptions on Groupon’s core Daily Deals business, reducing it by ~80 bps per year going forward to 36% from 40% over the next 5 years (vs. flat previously).
- Valuation is not inexpensive. Groupon currently trades at 19.5x our 2013 EBITDA estimate of $109 mm (inclusive of $150 mm in SBE), or 8.2x our $260 mm estimate x-SBE, which is roughly $200 mm below Street consensus. Moreover, although the company has $1.2 bn in cash on its balance sheet, we note that it also has ~$800 mm in accrued payables and expenses, suggesting less cash valuation support than it would seem. In addition, as the company stands to deleverage COGS from its expansion into the direct sale of Goods, we see its future cash position as potentially tenuous. Our newly lowered target implies that Groupon should trade at 7.4x our EBITDA estimate (or 3.1x x-SBE). Therefore, we expect to see further downside and rate the shares Underweight.
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