Morgan Stanley Says Groupon's 16% Decline In 2018 Is 'Overdone'

Shares of Groupon Inc (NASDAQ: GRPN) have fallen more than 15 percent since the start of the year, a move Morgan Stanley said is "overdone."

The Analyst

Morgan Stanley's Jonathan Lanterman upgraded Groupon's stock rating from Underweight to Equal-weight with a price target raised from $4.30 to $4.40.

The Thesis

Groupon's selloff since its fourth-quarter report brought the stock's valuation on 2018E EBITDA to 8x, which is a discount to its historical average of 10.5x, Lanterman said in a Monday note. The stock is trading at 7.5x on 2019E EBITDA, which makes it "fairly valued with limited downside" and the third-cheapest stock among the analyst's coverage universe, he said. 

The case for further downside in Groupon's stock is difficult to make for the following reasons, Lanterman said:

• Groupon's investments in its business could generate earnings growth.
• Groupon's business still faces a "Blue Sky opportunity."
• The company's international opportunity remains intact.
• Groupon's stock is expected to generate 43 cents of free cash flow, implying that it is trading at 10x on a free cash flow basis and has "downside protection."

While a bullish stance may not be appropriate at this time, Lanterman said would become more positive if Groupon+ shows signs of greater transaction frequency and if the company shows consistent, strong growth in several international metrics, including local gross billings and gross profit growth.

Price Action

Shares of Groupon were trading higher by more than 2 percent early Monday morning.

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Photo courtesy of Groupon.