Investing In Groupon: More A Gamble Than An Investment

| About: Groupon, Inc. (GRPN)

The termination of Groupon CEO Andrew Mason was not just your everyday firing. Let's be honest about it, it was an outright sacking. Mason will receive a severance of just $378.

You heard it right. That's not $378 million, but $378. But before you shed a tear for fallen CEO Mason, there's much more to this story than meets the eye.

It's also important to know that the quick descent of Groupon (NASDAQ:GRPN) may only be the start of something much bigger to come, that the problem may not lie with just Groupon, but may be systemic to the industry as a whole.

The bigger picture

While it's true Mason gets just $378, that's only because the severance package calls for six months pay, or half his annual salary. Mason walks with a 7-percent stake in the company worth almost a quarter billion dollars. While that's down considerably from when the company was trading in the mid-twenties, it's still a tidy sum. Groupon now trades below $6 per share.

So why go on about Mason's good fortune? Because it ties in directly with the underlying problem of the Groupon business model itself. This is a problem that extends far beyond Groupon and into the industry as a whole. This may very well have an impact on similar companies like LivingSocial and their ability to raise capital through initial public offerings.

The failure of the Groupon business model

The lessons learned from the fast-growth business model of Groupon can be found in its stubborn adherence to new customer acquisition, while ignoring customer retention almost altogether. This is a lesson for all companies looking to go public. While growing as fast and as big as you can might increase share value in the short-term, it's a recipe for long-term disaster.

What you wind up with quite frankly is a house of cards. The problem with the Groupon model on the ground was that while it initially brought in new customers to businesses, these new discount-oriented customers did not turn into long-term, full-price clientele. The traditional model for coupons is to bring in new customers at a deal just for the one time, then keep those customers for the long run paying full retail price. As it turned out, Groupon customers were demanding the discount every time.

The facts on the ground, a true-life story of failure

Jessie Burke found out the hard way that while Groupon might pack customers in, there is little if no profit to be made. Coupons are meant to drive new clientele into a place of business, not only with the hopes of repeat business but that these same customers will spend over just the value of the deal. For Jessie at Posies Café, the deal turned into a nightmare.

Not only did the deal seekers Groupon sent her not turn into regular customers, rarely did they even spend over the deal value. Instead of receiving maybe $5 over the deal value, Jesse found she was getting more like 10 cents. The Groupon business model was designed for maximizing profits for Groupon, not its clients.

Groupon's failure on Wall Street

The failure of the Groupon business model means a steep decline the company's share value. Shares now trade well below the Initial Public Offering high of $31.14. The stock closed at $6.36 on May 13, more than ¾ off its all-time high but still up from its low of $2.60 on November 12.

So, is Groupon a good buy at these low levels? Some analysts believe there is still room for the stock to grow and have even upgraded its outlook.

Shares in Groupon shot up 14 percent on May 9th after the company reported 1Q results better than Wall Street estimates. Groupon reported for 1Q that revenue was up 7.5 percent. Gene Munster of Piper Jaffary was so enthusiastic in fact that he raised his price target from $7 to $9. But for a stock that's already up 200 percent from its lows, it's this investor's opinion that as a momentum play, the boat has already sailed.

As for a buy based on fundamentals, they just do not seem to be there. Yes revenue is up, but from the bottom there really is nowhere else to go. While Groupon did bring revenue in above analyst expectations, $601.5 million over $590 million, still the company lost $4 million. Investing in a company that is losing money is not sound investment advice.

While the company may be bouncing back a little, it's important to remember that back in late February share value took a 29 percent hit on weak holiday sales. It was on February 28 that analysts downgraded the stock from an "outperform" to an "under perform." All it takes is another round of bad numbers and Groupon could be headed back down to the $2 range, or even farther.

If it's long shots you like, you'd have a much better chance at the horse races, or maybe at the slots in Vegas. As either a buy on fundamentals or just buying on the bounce, Groupon seems to now fit neither criteria. Best advice on investing in a dying company in a dying industry, just let it rest in peace.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.