Many of the banks that helped prepare Groupon for the public markets are hesitant to click buy on the shares of the daily deals site.
Five of the company’s underwriters, who had to wait until Wednesday to initiate coverage, stamped Groupon’s stock with neutral or hold ratings. Their price targets ranged from $21 to $27.
The stock, which in recent weeks has dipped below its offering price of $20, is currently trading around $22.75. It was off nearly 3 percent in morning trading on Wednesday.
Analysts echoed the longstanding concerns about Groupon, including competitive pressures, the unproven business model and limited upside opportunity. Two underwriters, Citigroup and Deutsche Bank Securities, even led with the same pun — “waiting for a better deal.”
Critics, in part, are skeptical that Groupon can sustain its aggressive growth trajectory. The company recorded revenue of $1.1 billion for the first nine months of the year, but also splurged on online advertising, spending about $613 million on marketing in that period.
Two of Groupon’s lead underwriters, Morgan Stanley and Credit Suisse, fell on the more bullish end of the spectrum.
Morgan Stanley, which won the coveted top-left spot in Groupon’s prospectus, initiated coverage at equal-weight, with a $27 price target. Though it showered praise on GroupOn for its “prime mover status and scale,” Morgan Stanley warned investors to “wait for a better entry point to build a position.” Morgan Stanley also pointed out that Groupon’s competitive advantage might be eroded as merchants became more sophisticated on the Web and rivals attacked its market share.
“Groupon’s competitive advantage of sales-driven leads, deal execution strategy and high quality customer service is not rocket science,” the firm said, “but has proven difficult to replicate at scale.”
Credit Suisse was slightly more cautious, with a $25 target, just 7 percent above the closing price on Tuesday. The firm said it had a positive outlook on the company, but also noted several risk factors, including low barriers to entry and a new business model where “58 percent of the voting shares are controlled by insiders.”
Deutsche Bank, the most bearish of the group, predicted a slight pullback, to $21 a share. “Our near-term neutral stance on Groupon shares rests largely in the nascency of the business model in the service/product shift, along with a transition from aggressive growth via marketing to improved profitability,” the bank said.
Still, the mixed bag of research reports on Wednesday did include several bullish calls. At least four underwriters, including the co-lead, Goldman Sachs, issued buy or outperform ratings.
Goldman, one of the most optimistic of the bunch, initiated coverage at $29 and praised the four-year-old company as “the key to unlocking the massive local advertising market with which the Internet has long struggled.”
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