Why Groupon Is Dying

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

Having been an investor during the original internet bubble (AKA Web 1.0), us the internet grizzled geezers can recognize a pretender company when one arrives on the scene. In this case the pretender is Groupon. Groupon the company should have never gone public. It should have stayed in that safe cocoon that is private investment, but instead it decided to venture into the bright lights of Mr. Market, and most of us who have taken a good look think there is something very rotten in Denmark.

Groupon.com is a handy little app and website for me. I look at the deals, and may take them or leave them. My experiences with them have been mixed and sometimes I find new local places that catch my eye. 

Unfortunately, Groupon (NASDAQ: GRPN) the company is a different story.

If you look past the razzle and dazzle of its mobile apps and its e-mail subscription service you see that Groupon is fading in some very important ways. The CEO is jumping ship and there have been some allegations in the past of accounting sins (both of which are excellent reasons to sell all on their own). There are other players are in the space, and they're real threats.

Amazon (NASDAQ: AMZN) has launched their local deals program, and Amazon has a much bigger base to draw upon including a heck of a lot more credit cards stored in its system (revenues for Groupon in 2011 were a middling $1.8 billion; for Amazon they were $48 billion in 2011) . Amazon basically has Groupon in its crosshairs and we can see growth slowing down the last 2 quarters.

Google (NASDAQ: GOOG) reportedly was looking to buy the company, but I am sure they took a good hard look and decided to pass. Now it has come up with Google+Local which will compete directly with Groupon. Yelp has a strong mobile presence and much better management than Groupon. Yelp's strength lies in its user experience and social aspect. Foursquare is private, but reportedly it is in talks with Apple to add its check-in data to Apple Maps (that would be a coup, although the new Google Maps rocks, I think that Foursquare will provide some much needed coolness factor and usability to Apple maps).

Let me run a quick SWOT analysis.

Strengths: Subscriber growth and revenue growth. Year over year growth is over 30%, even though the last quarter did not show any growth compared to the one previous. It has a decent brand name, but it is quickly losing its luster as other competitors come in to a very crowded space.

Weaknesses: It's weak on the social networking front. Facebook (NASDAQ: FB) has promoted posts from businesses and is starting to exploit better the mobile segment. The giants are all getting into Groupon's segments and at this point Groupon looks to be crushed like a grape. Yelp and Foursquare do a much better job with the social networking and offer discounts and other services Groupon offers. 

And between you and me I get much better selection visiting Amazon or even the online store of Costco (NASDAQ: COST), where if you are a member you get free shipping, and their deals don't have all of these strings attached. For example I have been to several small businesses and they have been restricting the use of Groupon coupons (for example, no use for beer, no use for anything except eat-in, etc.).

Opportunities: It's a possible takeover candidate, which could lead to a big upswing in share price. Continued growth is possible, but it needs to happen soon, or else the company will start burning cash and end up like the littered remains of all of those dot.coms that died 10 years ago.

Threats: Bigger players such as Apple, Facebook,Google and Amazon are competing directly. Nimbler players are coming from behind; watch Foursquare, Yelp or Trip Advisor. The space has a lot of competition, and Groupon is being squeezed on all sides with very little strategy for continued growth.

Groupon is a sad story. The bigger players are angling for it, management is being replaced, prospects for a buyout are getting dimmer by the day, and the share price continues to tank despite occasional 5% pops that look to me like dead cat bounces.

My bottom line: Groupon is basically a glorified classified and coupon clipper web site. They do this job no better than the local paper. People have tired of it, and businesses are not seeing the payoff for the discounts they are offering as evidenced by the restrictions being added. My belief is that this one has peaked and is going down in 2013.

The P/E ratio remains elevated at 25 or so, and price to sales is a lofty 1.4-1.5. I would value this sucker as a retailer or a newspaper with a PE of no more than 12-13. On the bright side, they can cut employees (their profit per employee is a negative number) and cut the burn rate of cash down in order to hope for a buyout from a company that has lots of cash and very little regard for their shareholders in terms of past acquisitions. (Can you say Mr. Softee or Mr. Hewlett-Packard?). There is no moat whatsoever for their business model and no real social media aspect to it. I vote to kick them off my island. What about you?

xerohype owns shares in Amazon and Google, and he wouldn't touch GRPN with a 10 ft pole. He does have an executive membership in Costco and do wish they would build a warehouse nearby.The Motley Fool owns shares of Amazon.com, Costco Wholesale, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Costco Wholesale, Facebook, 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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