On Friday, shares of daily-deals specialist Groupon (GRPN -9.62%) closed up more than 12% after Deutsche Bank analyst Ross Sandler upgraded the stock from hold to buy, simultaneously increasing the firm's price target from $6 to $10.
However, even after the pop, that target still represents nearly 30% upside for Groupon shareholders from today's price around $7.70 per share.
That raises the question, then: With all this newfound excitement, is now the time to buy shares of Groupon?
The upgrade
To justify his change of heart, Sandler noted the importance of Groupon's efforts to shift its business away from an overreliance on pushing a large number of emails to consumers in an effort to drive traffic to the site.
Instead, Groupon is now placing more strategic focus on what interim CEO Eric Lefkofsky described last month as their "Pull marketplace," which works to encourage consumers to visit Groupon to search for -- or pull, if you will -- and buy a variety of local deals in their area.
Of course, this new model lends itself nicely to consumers' increasing reliance on smartphones and tablets, for which Groupon's respective mobile app garnered a whopping 7 million downloads last quarter alone. Better yet, Lefkofsky also stated during the company's most recent earnings conference call that the average mobile customer buys 50% more than their traditional desktop browser-using counterpart.
As a result, by the end of last quarter, 45% of the company's North American transactions came from mobile users, which is part of the reason Sandler also expects Groupon's billings to grow 20% this quarter. This, in turn, could boost EBITDA by as much as 30% higher than Sandler's previous expectations, possibly making Groupon "one of the best plays on mobile in the Internet space."
The bear case
Unfortunately, while I can't fault the folks at Groupon for correctly shifting their focus to the more promising mobile market, that doesn't change the fact that its shares currently trade at nearly 27 times next year's average earnings estimates.
What's more, though Groupon could certainly ride last week's momentum to build on its impressive 58% gain so far in 2013, its long-term success remains far from assured given the currently limited scope of its business model. In addition, the ability of a shift of that scope to mobile to alleviate consumers' "deal fatigue" remains questionable at best.
Finally, with daily deal offerings from the more diversified heavyweights like Amazon-supported (AMZN -1.11%) LivingSocial and Google (GOOGL 0.69%) Offers, Groupon will also likely be hard-pressed to continue growing sales at a pace that can support its increasingly inflated valuation. Even so, that's why Groupon is hoping its Goods service can serve as an attempt to convince consumers that it can serve as a wider-reaching local retail destination.
Even so, as fellow Fool Steve Heller recently pointed out, those aspirations seem lofty considering there are few barriers in place to stop deep-pocketed competitors like Amazon from easily stepping into Groupon's turf. As a result, I think Groupon still has a ways to go to prove to shareholders its moat is worthy of their investing dollars over the long term.
In the end, then, despite this preemptive upgrade on Groupon's speculative upside, this is simply one risky bet I'm not willing to make.
