Groupon shares soared last month amid optimism for the company’s new cash-back product, but now investors are back to worrying about the challenges of being a standalone deals site.
On Wednesday, Goldman Sachs analyst Christopher Merwin assumed the firm’s coverage of Groupon by assigning the stock a Sell rating. His view is that while that new product is a step in the right direction, Groupon’s customer acquisition costs are getting higher.
Groupon+, the company’s cash-back service, lets users link their credit cards to their accounts and get savings automatically. Longer-term, Merwin is optimistic that Groupon+ “could be a tailwind to customer frequency and increase the number of deals merchants are willing to offer.” More immediately, however, his concern is that marketing costs make the economics of Groupon’s business tricky.
Further, he worries about competition. Groupon tried owning its own food delivery service, but it sold that part of the business to Grubhub this summer in an acknowledgment of how tough it is to take on the giants. Through the arrangement between Grubhub and Groupon, diners will be able to order Grubhub food from Groupon’s platform, which initially looked like a win for coupon site. But Merwin believes the benefits will be limited given how easy it is to place orders directly on Grubhub’s app.
He adds that “successful local marketplaces need to own the transaction in order to maximize long-term economics,” meaning that Groupon needs to find more ways to “close the loop” on purchases and make sure that consumers stay on the site.
Groupon shares are down 2.9% Wednesday following Merwin’s note, though they’re still up about 30% in the last three months.
Big Picture: Groupon’s stock fell after an analyst highlighted the company’s high customer acquisition costs and competitive challenges.