3 Reasons Why Groupon Could Outperform the Market

Given Groupon's current conservative valuation, both Piper Jaffray’s $16 price target and Priceline's acquisition of OpenTable make Groupon's stock look cheap.

Jun 26, 2014 at 2:00PM

Groupon (NASDAQ:GRPN) has been trending higher over the past several days, and for good reason. An analyst upgrade, coupled with acquisition action in the space, has focused the limelight on Groupon, and the final investment verdict might be more favorable for Groupon than most investors realize. Here are three reasons why Groupon can trade significantly higher over the next 12-24 months and outperform the general market.

Reason No. 1
Piper Jaffray's Gene Munster reiterated his overweight rating for Groupon with a $16 price target, saying that Piper Jaffray's proprietary deal-tracking system showed that the number of deals available on Groupon has steadily increased since October 13, when the firm began this analysis.

Furthermore, Munster said that the findings are a "confirmation of the longer term trend of Groupon increasing its deal density, which moves the company closer to its goal of building the leading local deal marketplace. This is different than Groupon's historical push-email business, moving toward a pull model driven by consumer demand."

Munster also said that, in its most recent quarter, Groupon reported 200,000 daily deals on the network, up from 140,000 in December. The company also expects that this number will increase to 500,000 daily deals globally in 3-4 years, suggesting a 30% incremental growth in deals for the next several years.

One reason Groupon has underperformed so much over the past several years is because it cannot make money. Assuming that Piper Jaffray's call is correct pertaining to deal growth, Groupon should be making good money, and the target price of $16 per share is entirely possible (if not easily obtainable).

Reason No. 2
OpenTable's (NASDAQ:OPEN) acquisition by Priceline (NASDAQ:PCLN) sparked a rally in companies providing deals, reviews, food delivery, and anything app or Internet-related, like Grubhub.

Again, this was for good reason; if Priceline was willing to pay 12 times revenue and 14 times book value for OpenTable, then what are other related companies in the space worth?

Sources told DealReporter that OpenTable talked with other bidders beside Priceline before accepting the $2.6 billion bid. Was there a secret bidding war for OpenTable under our noses? The 12-times-revenue price paid implies that there was.

Is there some kind of buyout frenzy in the social and deal space going on here? If so, then anything goes, including another attempt by Google to take over Groupon, as it already attempted in the past.

Irrespective if there was a bidding war or not, the truth of the matter is that the OpenTable deal should increase the value of all other related stocks, Groupon (among others) included.

Reason No. 3
In my last take on Groupon, I said that Groupon might be the best-valued stock in the social space. Coupled with the fact that shares trade at a price-to-sales ratio of 1 -- based on analyst estimates for Groupon's revenue in 2015 -- if the company can become only slightly profitable, trading at Piper Jaffray's price target of $16 per share could be considered cheap, compared to what Priceline paid for OpenTable.

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George Kesarios has no position in any stocks mentioned. The Motley Fool recommends Google (C shares) and Priceline Group. The Motley Fool owns shares of Google (C shares) and Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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