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The Poop On Groupon

Tim Knight from Slope of Hope's picture




 

From the Slope of Hope....

Only half a year ago, Groupon was the talk of the town. It was the biggest, hottest IPO on the horizon,and it was the darling of the social media industry. Imitators were everywhere, but there was one giant that was far ahead of everyone else: Groupon.

Well, one glance at a stock chart will show you just how much the biggest, hottest IPO has been embraced since it went public. I offer you the following:

0421-grpnchart

 


Now that it's lost two-thirds of its peak value (which occurred, cruelly, on the very day of its initial public offering), Groupon has pivoted from enviable leader to pitiable loser. And the stock price, from a chartist's perspective, doesn't have a firm shelf of support upon which it can rely for some much-needed stabilization. There is nothing but air between its current valuation and $0.00.

 

This must be particularly painful for original shareholders because of an important fact that 99% of the world has forgotten: none other than Facebook was ready for acquire Groupon for about $6 billion about a year and a half ago. Groupon told them to go jump in a lake.

0421-turndownoffer

Before continuing, let's check out Groupon's current market capitalization, shall we?

0421-currentcap

OK, so let's agree that the current market cap and the prior offer are roughly the same price (what's a billion dollars between friends? I mean, sheesh, that's just one Instagram!) So the reality of the situation is that the management of the company now faces the never-ending nightmare of being a public company (with all the attendent expenses, shareholder lawsuits, quarterly earnings reports, Sarbanes-Oxley, and all of that other happy hoo-ha) instead of cashing out for an amount that, based on Facebook's valuation growth over the past eighteen months, would certainly be far greater. 

In other words, would you rather be sitting on a ton of pre-IPO Facebook stock right now (whose liquidity is just a month away at this point) or a smaller amount of Groupon stock which comes with the millstone of being a publicly-held enterprise? Yeah, the first one. I thought so.

It's interesting too, looking at the Google Trends for Groupon. The highlights tell the story nicely. Google is "close" to buying them. The deal doesn't happen, so Facebook fires up a competing feature. Then GRPN goes public. Surges. Slumps. And then gets "probed" by the SEC, which has got to be uncomfortable.

0421-googletrends

 

0421-mason

I've had a special interest in Groupon (as opposed to other "social" companies whose stock are falling to pieces, like, say, Pandora) for a long while. There are a few things about the company that have never quite sat right with me:

(a) Accounting Questions - As a chartist, I usually don't care about fundamentals such as accounting. But the stories floating around about the not-quite-kosher accounting got my attention.

There have actually been a number of "mini-scandals" going back over the past couple of years. But here's a simple analog to capture the failure of the "smell test" - - let's say I started a company that made change for people (e.g. you come in with a dollar, and I give you 99 cents in change and keep a penny for myself as a convenience fee).

Let's say over the course of a year I made $100 million in change for people. What are my revenues? To my way of thinking, they are a million dollars. I'll have expenses, of course, and what's left over is profit.

But my impression of the Groupon approach - - at least before they cleaned up their act - - is that the same business would proudly declare they had $100 million in revenue. After all, the cash passed through my hands, didn't it? But it takes a very distorted view of the world to believe that a business should be represented in this fashion.

(b) Dumping stock before the IPO - historically, venture capitalists put money into a company to fund the company's growth. These days, it seems late-stage VCs have lost enough power that they have to shove stock directly into the pockets of early employees in order to get a deal done. Witness this finance round from the company's own S-1:

0421-stockdump

 

It just seems bad form, to me, to allocate the vast majority of an "investment" to the purpose of allowing founders and early VCs to take hundreds of millions of dollars off the table. I mean, sure, if you're Mark Zuckerberg, and if sell off a few million bucks of stock to buy a nice house, a nice car, and so forth - - bully for you. But to dump a meaningful portion of your stock even prior to an IPO doesn't exactly scream a lot of faith in your own enterprise.

Although, it seems, they were smart to have done so. After all, if someone's going to hold the bag, why not let it be some schmuck retail investor?

(d) The service itself - I just don't know how consistently popular these Groupons are going to be. You've all read the stories about small merchants giving the service a try once and vowing never to go back.

But I'm speaking from the standpoint of a consumer who, I would guess, would be the very model of a Groupon customer. We've got a family. We spend ungodly amounts of cash on eating out, vacations, and all manner of consumer goods and services. We are probably in the 99th percentile in terms of technological savviness.

But, in our lifetimes, we have bought two - - count 'em - - two - - Groupons. One of them was for a hair stylist. The other one is for The Counter (a local burger place). And the hamburger coupons are something I already resent, because they expire soon and it turns out they only work at a location which is a half hour drive from here, as opposed to the local establishment. So I'm kind of pissed that we even bought these coupons, the 50% discount notwithstanding.

Some people think Groupon's burn-out as a public company is simply a harbinger of what's to come with the oh-so-widely anticipated IPO of Facebook next month. I don't. I think all these "social" companies are going to follow into two camps. There are going to be dogs like Pandora, Groupon, and Zynga - - companies that I am highly confident will all continue to wither away - - and there are going to be the winners who basically, like Google, have a monopoly on some certain aspect of the web. LinkedIn, for instance, and....Facebook.

Bottom line for me is that Groupon's stock performance isn't a surprise to me at all. There will be hopeful "pops" in price along the way, but my opinion is that this thing is going to wither into sub-$5 territory within the year.

 

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Sun, 04/22/2012 - 17:57 | 2365378 malek
malek's picture

Ahem - Google or Facebook made an offer? (Or both?)

The text and the screenshot seem contradicting to me.

Sun, 04/22/2012 - 03:40 | 2364417 John_Coltrane
John_Coltrane's picture

Can't comment on the GRPN coupons but their "business" model is really sucky.  So, I bought a few GRPN Apr 20 puts a couple of months ago, when is was selling for around $20/share.  So, my "put coupons" paid off nicely on Friday with a nice 220% ROI.  Liked those "coupons" so much I bought some more July 13 puts (will they still be in business in July- Any bets?)

Sun, 04/22/2012 - 01:50 | 2364378 Mary Wilbur
Mary Wilbur's picture

If Facebook really offered to buy Groupon for $6 billion a year and a half ago then its run by idiots.

Sun, 04/22/2012 - 00:55 | 2364360 q99x2
q99x2's picture

Poop on FaceBook too; and GS; and the FED; and Hillary Clinton; and HamyWanger; and the New World Order. Poop on the Rotheschilds; and the Bushs; and the Rockefellers; and even Bill Gates; and Draghi; and Monti; and on and on till we are all out of toilet paper.

Sat, 04/21/2012 - 21:33 | 2364257 grapeape
grapeape's picture

i had a yugo long ago, very cheap and very reliable too. never broke down while i owned it. one winter it got down to -32 F, the ole yugo was the only car in the neighborhood that would start. i went around giving neighbors a jump. no bmw's in my neighborhood, but i bet they would have need the lil yugos help too.

 

Sat, 04/21/2012 - 19:35 | 2364154 Mach1513
Mach1513's picture

I keep getting G-on offers even though I

have unsubscribed three times.

All they do now is piss me off.

 

 

 

 

 

 

 

Sat, 04/21/2012 - 19:35 | 2364152 Ungaro
Ungaro's picture

GroupOn, GroupOFF

Sat, 04/21/2012 - 17:50 | 2364051 r00t61
r00t61's picture

Does fundamental or technical chart analysis even matter to the HFT algos that make the markets?

Sat, 04/21/2012 - 17:49 | 2364048 NuYawkFrankie
NuYawkFrankie's picture

Call me cheap, but thanks to Groupon I managed to get a rub 'n tug at Suzie Wongs House of Oriental Massage for 1/2 price!  (No discount on tip though :( 

Thinkin off starting a similar service called GropeOn  ;)

Sat, 04/21/2012 - 21:00 | 2364225 Freddie
Freddie's picture

How was the Peking duck?

 

Sat, 04/21/2012 - 17:09 | 2364022 adr
adr's picture

The failure is in believing these corporations actually exist to make money for anyone other than VCs and invesment banks. The criminal CEO is allowed to become a billionaire over night for allowing the scam to continue.

Sort of like the cop who is given a million dollar bribe to let the $200 million in drugs pass through his door.

Is there any difference between Goldman Sachs and a columbian drug cartel? Nope. The players live the same lifestyle. Hookers, booze, drugs, fast cars, mansions, and megayachts.

Post IPO follow Fuckerberg's expenditures and follow that of a newly minted drug kingpin. You won't be able to tell the difference.

Criminals and their enterprises always follow the same patterns.

Sat, 04/21/2012 - 21:03 | 2364226 Freddie
Freddie's picture

+1

I heard this type of sh*t from SillyCon Valley scum back in 2000.  Don't bring us a business plan unless you have a Stanford MBA and your business is in SillyCon Valley.  When you get the VC money you have to buy Oracle, Lucent, Sun Micro and Cisco boxes.   And in the end you will lose all your equity because all we care about is some fake ass company we can IPO and the investment banks can HFT on IPO day to make us rich.   The Mafia is more honest than this scum.

Sat, 04/21/2012 - 20:51 | 2364216 lotsoffun
lotsoffun's picture

believe it or not.  the goldman guys aren't interested in sex or drugs.  guess what they like for it's own sake.

 

Sat, 04/21/2012 - 20:06 | 2364178 RafterManFMJ
RafterManFMJ's picture

Is there any difference between Goldman Sachs and a columbian drug cartel?

 

Of course there is! A Columbian drug cartel provides consumer goods to people, with cheaper price and higher quality, every year.

Sat, 04/21/2012 - 16:35 | 2363974 Westcoastliberal
Westcoastliberal's picture

Comparing Groupon with Facebook is kinda like comparing a Yugo with a BMW.  One has value the other, not so much.

Problem with Groupon is their business model is highly flawed.  In order for them to continue in business, they must convince business owners that it is in their best interest to steeply discount their product/service, then pay Groupon a fee to expose this huge discount to the market.  The idea is to acquire new customers by forcing a change in their habit patterns and gain repeat business (without the huge discount).

This might work okay in a real liquidation of stock sense, but not in a repeat customer sense.  Merchants can even suffer losing regular customers by creating an influx of bargain shoppers thus degrading their service, with many deciding never to go back.  Sort of the reverse of the desired effect.

Of course, Groupon can always change their business strategy to something else, and that might work.

But in the short term, IMHO it's a "pump and dump".

Sat, 04/21/2012 - 20:59 | 2364223 Freddie
Freddie's picture

The overall analysis is correct except Facebook is not a BMW but more like a Chevy Volt that your Dear Leader bailed out by robbing the bondholders and American taxpayers.   Or Fisker or some other lib f***ing scam.   Facebook is a Hope & Change data collection on stupid saps who use. Skynet has all the data now.

Sat, 04/21/2012 - 16:55 | 2364005 sessinpo
sessinpo's picture

Westcoastliberal             2363974

Comparing Groupon with Facebook is kinda like comparing a Yugo with a BMW.  One has value the other, not so much.

 

Comment:

Valuation is relative. I value neither of them so I own neither of them and won't. I can and do live without both.

 

 

Sat, 04/21/2012 - 17:14 | 2364026 adr
adr's picture

Facebook isn't a BMW. You need to pay good money for a BMW. If you told someone you would take their Yugo for free, they'd probably give it to you. Probably really wouldn't care when its gone.

All you ever hear about Facebook is how many users they have. Yugo sol more cars than BMW during its time. What do you call a company that gives its product away for free that the majority of its users use that product for less than 10 seconds a day? I don't call it a $100 billion.

Sat, 04/21/2012 - 16:24 | 2363954 Earl of Chiswick
Earl of Chiswick's picture

Mr. Knight, you indicate that you have been following this company for a very long time. Is this the first article you have published on Groupon?  Your assessment seems fine but other than a $5 target it's all old news. Groupon is a one trick pony with a bad leg.

Sat, 04/21/2012 - 22:41 | 2364303 DoChenRollingBearing
DoChenRollingBearing's picture

Tonight, my wife and I tried out a Groupon coupon.  Our daughter some time ago bought one for us to go to a steak house to celebrate my birthday (hey it was a while ID thieves!).

So, we went, and when the bill came, I saw that the Groupon was not worth anywhere near as much as I had thought it would.  Granted, the Groupon itself stated that it was only good for one appetizer and one entree each, wine (etc.) was extra.  And they had a "Special Groupon Menu", so the full choice of entrees was not available.

Netting it all out, I had thought that a plus-or-minus $100 meal would only cost us some $50 or so.  Nope.  $80.

If Groupon does not offer REALLY GOOD DEALS (which this one was NOT), then this lil ol anecdote would suggest that you NOT buy Groupon shares.

Sat, 04/21/2012 - 15:46 | 2363919 bank guy in Brussels
bank guy in Brussels's picture

This article says, in its original form:

« ... Facebook was ready for acquire Groupon for about $6 billion about a year and a half ago. »

Did you mean Google offered this, or both offered this, or the pieces that say this was a Google offer are wrong?

Perhaps Tim Knight can fix the (assumed) error or explain for later readers.

Of course Google and Facebook are both CIA companies anyway (seed money via conduits associated with CIA's In-Q-Tel etc.), so it is the same 'buyer' in one sense.

That would also explain why the SEC went after Groupon - they dared to say 'No' to the CIA - US government companies.

Sat, 04/21/2012 - 17:21 | 2364032 jessiekay
jessiekay's picture

You should know that there is no respect AT ALL of the private life since a long time in the US and that all your Emails are already in the register of the big brothers !!!!

Do NOT follow this link or you will be banned from the site!