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Can Groupon Bounce Back After Last Week's 14% Drop?

By Rick Munarriz – Mar 14, 2016 at 2:35PM

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The group-buying site operator gets downgraded, but things aren't as bad as they may seem.

One of last month's biggest winners is now one of last week's biggest losers. Shares of Groupon (GRPN 3.70%) may have soared 76% in February, but it's been a different story in March. The stock surrendered 14% of its value last week, after a bearish analyst note was published.

UBS analyst Eric Sheridan lowered his rating from neutral to sell. His 12-month price target of $3.20 suggests 23% of downside, even after last week's tumble. Sheridan feels investors will get burned as the daily deals leader's margins will be challenged in the near term as it spends on marketing to combat slowing customer and engagement growth. Groupon's push into physical merchandise a couple of years ago -- Groupon Goods -- is also facing heightening competition from dot-com savvy discounters.

Sheridan isn't the only Wall Street pro cooling on Groupon's bottom-line prospects. Analysts now see Groupon posting a small deficit in 2016. Groupon has posted several years of losses before breaking through into profitability last year. Now it's likely heading back into the red.  

Image source: Groupon.   

Groupon wasn't the only local leads provider to get talked down by UBS last week. Yelp (YELP 1.43%) was also lowered to sell by Sheridan. The competitive climate -- primarily in the form of larger Internet players that are emphasizing local search -- is intensifying, and Yelp could be a casualty. 

It's a rough time for Groupon and Yelp to get downgraded. Both stocks were shredded through 2015, losing more than half of their values. They both started to rally for a bit last month, but now pessimism is starting to bleed back into the stocks. It seemed like a no-brainer when Groupon and Yelp went public as fast-growing Internet companies in 2011 and 2012, respectively. 

Neither company is going away. Yelp kicks off 2016 with $370.8 million in cash and no long-term debt. Groupon's balance sheet is even nicer with $853.4 million in debt-free greenery. Groupon is still posting decent growth in its North American billings, offset by weakness overseas as it pares back its international operations. Yelp keeps growing at a double-digit clip, but it keeps burning investors by posting wider deficits than analysts are targeting. That happened in each and every quarter through 2015.

Groupon has a lot to prove in 2016. It has to make sure that it can keep growing in its home market, but investors may remain on the sidelines until they see that it is over its margin crunch. It can help make its own luck by using more of its proceeds to either aggressively repurchase its shares of make game-changing acquisitions, but the clearest path to becoming the market darling that it could've been is to show that it can be an indispensable tool for local merchants without having to sacrifice its own financial results along the way.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Yelp. 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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