What: Shares of Groupon (NASDAQ:GRPN) surged on Monday following an analyst upgrade. At 3:30 p.m. EDT, the stock was up about 11.5%.
So what: Samuel Kemp, an analyst with Piper Jaffray, upgraded Groupon on Monday to "overweight," attaching a $6 price target. That price target represents a 72% premium to Groupon's closing price on Friday.
The main impetus behind Kemp's upgrade is the belief that the consensus estimates aren't accounting for potential profits generated from new customers. According to the analyst, Groupon is plowing an extra $150 million to $200 million into marketing in 2016 in an effort to acquire customers. This could produce as many as 3.5 million to 4.5 million new active accounts.
Kemp also pointed to new management as one reason to believe the company could turn itself around. Groupon named Rich Williams as its CEO in November of last year, and the company has shifted its strategy since. Williams admitted that Groupon had scaled too quickly, and he plans to streamline the company and stop chasing low-margin opportunities.
Now what: It remains to be seen whether heavy marketing spending will boost Groupon's business as much as Kemp believes. As always, buying or selling a stock based solely on an analyst upgrade or downgrade is bad idea. Investors seem to be latching onto Kemp's analysis, sending the stock higher on the upgrade. But Groupon will need to execute in order to justify the new price target.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.