Should You or Google Really Care About Groupon?

Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Groupon (NASDAQ: GRPN) saw a run up in its stock price on the back of rumors of a possible acquisition by Google (NASDAQ: GOOG). As some of you might recollect, Google had once offered to pay as much as $6 billion for the company before it went public, but for some reasons the acquisition did not materialize. 

Now that Groupon’s total market cap is worth about $3 billion, would Google still be interested? I don’t think so. And here’s why…

Not a good deal anymore

First of all, Groupon’s margins haven’t been anything to boast about from the get go. While the company has clocked spectacular revenue growth rates in the past, the bottom line has stayed in the doldrums. 

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GRPN Revenue Quarterly data by YCharts

Sadly, even the dizzying growth rates Groupon used to enjoy seems to have fizzled out today. And it doesn’t take a lot to figure out why.

Groupon faces competition from hundreds of other “me too” players that have swamped the daily deals market. Surprisingly the company still continues to attract about 50% share of the daily deals space. But I’d attribute that to Groupon’s marketing success. The business itself suffers from a fundamental flaw: The premise of offering deep discounts on goods and services in the hopes of attracting repeat customers.

Ironically those are the kind of customers Groupon is failing to attract. Those who visit Groupon’s website merely do so for the deals and more often than not, fail to turn into loyal customers. The merchants using Groupon have realized this and have consequently cut back on great offers Groupon was once famous for. That’s also why we saw revenue growth come to a complete halt in the third quarter this year.

But it isn’t just Groupon. Living Social, one of Groupon’s closest peers and a company in which Amazon (NASDAQ: AMZN) holds a 30% stake, has also been doing poorly, and has recently announced plans to lay off 400 employees, or 10% of its global workforce.

With these negative factors surrounding Groupon, I fail to see why Google would pay top dollar for just a brand name when it already has the capability to develop its own version of Groupon. Google can very well invest its resources to develop its existing “Google Offers” platform and take it to the next level.

So now that we know how unlikely Google’s takeover of Groupon is going to be, let us focus on what the future holds for Groupon as a standalone company.

What the future holds

Well, to put it briefly, I see tough times ahead for Groupon, at least for the short term. But on the bright side, a fundamental shift in Groupon’s business is already under way. Groupon is slowly diversifying toward becoming a broader e-commerce website on the lines of eBay and Amazon rather than just sticking to offering daily deals.

According to the company’s third quarter results, direct sale of goods accounted for 25.5% of total revenue. But this revenue didn’t come cheap. Direct costs associated with Groupon’s goods division accounted for a whopping 70.2% of the company's total direct costs.

This only goes to show that e-commerce might be the solution to Groupon’s woes, but if not handled well, could actually contribute to the problem rather than solve it. A prime example can be that of the amazing Amazon, whose bottom line dipped into the red in the third quarter, despite boasting of $13.8 billion in revenue.

So it isn’t that simple. In order to continue expanding its e-commerce initiatives, Groupon would need money… and lots of it. That’s where the $1.2 billion of cash and equivalents on its balance sheet could come in handy. Though I’m not sure whether that would be sufficient enough to do the job.

Wooing merchants back

Groupon is also reported to be working on a software tool called DealAdvisor, which allows small merchants to set up their own offers on Groupon’s website. This would probably attract more clients to do business through Groupon and might also encourage sellers on other websites, such as Amazon and eBay, to sell their merchandise on Groupon’s website as well. But how much of an impact it would have is yet to be seen.

The Foolish bottom line

All in all, I feel that Groupon does have a good shot at making a recovery. Just don’t expect it to turn into the next Amazon almost overnight! Even then, Amazon’s abysmal margins aren’t something desirable either.

So what do you guys think about the acquisition buzz surrounding Groupon and its future as a standalone company? Feel free to express yourself in the comments section below. 

kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of and Google. Motley Fool newsletter services recommend and Google. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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