Bubble 2.0 Isn't Still On For Groupon

| About: Groupon, Inc. (GRPN)

Groupon (NASDAQ:GRPN) recently announced that it was delaying its IPO. Since the announcement, Groupon haters have come out in full force, using the IPO delay as an opportunity to remind the public of Groupon's historical blunders. The most memorable Groupon blunders include an expensive Super Bowl ad that reminded many of the kinds of Super Bowl ads broadcast during Bubble 1.0; the ad was also interpreted as politically offensive by many, and Groupon was slow to apologize. In addition were the use of a controversial accounting methodology that downplayed the cost of customer acquisition and an "accidental" leak of an internal memo to employees that could be interpreted as violating the SEC's silent period mandate.

While these blunders provide haters with ammunition, they may have the effect of obfuscating the real problems with Groupon. The firm is basically a sales organization with no specialized niche. Without internal software developers or a community of developers working off an API -- something much more common with the rest of the firms in Bubble 2.0 -- Groupon will be very limited in its ability to leverage network effects and to create personalized offerings. I am a big believer in sales/service organizations, particularly Internet-oriented ones, but they need to be niche-oriented and leverage specialized knowledge to succeed, not simply a mass-market play, which will be better served by software-oriented infrastructure companies like Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN).

Spending more than you're taking in may be fashionable for nation-states and venture capital-funded Internet companies, but it's a recipe for failure. Groupon's strategy of "get a lot of users and then make money," and its belief that a high cost of customer acquisition is justified because the lifetime value of these customers is even higher, is unlikely on the basis of historical precedent. I recall hearing the same arguments as an analyst focusing on Internet stocks during Bubble 1.0; CDNow is one example of a company that vastly overestimated the lifetime value of customers during the bubble, and was forced to re-work its marketing costs after the bubble collapsed. I expect the same of Groupon.

Groupon is the worst of the Bubble 2.0 crowd; it is the one most likely to be a Ponzi scheme, the least defensible, the least likely to leverage meaningful network effects, and the most overfunded. I don't believe Bubble 2.0 is ending; rather, I expect it will resume once the Fed announces more stimulus. But Groupon is the worst of the bunch. I don't recommend shorting in this environment unless one is an active trader very fluent in technical analysis, but Groupon is one I'd stay away from if the company ever manages to get to the IPO window, even for those bullish on Bubble 2.0.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.