Shares of the online deals service Groupon soared after reporting strong first-quarter earnings results on Monday, gaining some 33 percent since Friday’s close.
And that’s just the beginning, Mark May, analyst with Barclays Capital, told CNBC’s “Squawk on the Street.”
“Groupon is tackling a massive multibillion market which is local commerce, and we think that growth in mobile smartphone adoption is going to be a tailwind for the company for several years,” said May.
The company , which connects merchants to consumers by offering local goods and services at a discount online, ended the last quarter with 36.9 million active customers, 140 percent more than the same period a year earlier.
Barclays’ May has an “overweight” rating and a $27 price target on Groupon.
Is that too good to be true? While Groupon is up 11 percent this month, its shares year-to-date are down about 29 percent.
Furthermore, skeptics chalk Monday’s price pop to “short-covering” (buying back shares previously sold short) by traders. If a company’s stock has jumped as a result of short-covering, it is often considered a temporary blip.
Need another reason to doubt soaring shares? Groupon is about to get hit with a supply glut. The three-year-old company’s post-initial-public-offering lockup date is June 1, when about 600 million shares go on sale.
“The lockup is going to be a major overhang,” May conceded. “It’s a massive amount of stock that's coming to market; over 90 percent of the company is outstanding, so from a tech standpoint, that’s clearly going to weigh on the short term.”
Still, May says Groupon’s pending lock-up hurdle is “typical of any IPO,” not unlike those related to LinkedIn or Google's IPO back in 2004.
For May, Groupon’s performance has earned it the benefit of the doubt, and he notes that over the last four quarters, Groupon has generated $310 million in free cash flow.
“In 3 years, they have grown like a rocketship,” he said. “You gotta give the team some credit for the numbers they’re putting on the board.”
—By CNBC’s Jennifer Leigh Parker
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Mark May does not personally own Groupon shares, but Groupon is an investment banking client of his firm, Barclays Capital.
Follow Jennifer Leigh Parker on Twitter @jparker741.