Today Groupon (NASDAQ:GRPN) is offering one of their best deals yet! They are offering the general public the ability to sell little pieces of their company for over $24 per share. The case with Groupon is not if, but when, their stock will start plummeting downwards. The following article will outline exactly why stocks in Groupon will never be a sound investment.
Groupon is Expanding
Groupon has been expanding aggressively through purchasing startup companies which should be a cause for concern to shareholders. Purchasing companies like Adku, Mertado, and Campfire labs all within the last eight weeks will not be the necessary steps to bring Groupon to profitability. Groupon should be focusing on their core business structure and start making money before they take after the well established tech companies like Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) in acquiring start-ups. Furthermore they're moving their own coupons into industries where they're in way over their head. The discounted travel industry has been around for years and is saturated with companies like Expedia (NASDAQ:EXPE), Priceline (NASDAQ:PCLN), Red Tag, Hotwire, Flight Centre etc. This is a dangerous world for the likes of Groupon to be entering while they're trying to stop the bleeding. The tech world is littered with companies which looked to expand outside of their core competencies too early in their life cycle. Groupon will soon be among these fallen techs.
Groupon is currently losing money. Lots of money.
But that's not a problem right? Many tech companies lose money in their early years before striking it rich. While that may be true, the companies which have come out of the difficult years of heavy losses are doing so through high R&D expenses while developing a new product. Groupon has no tangible products. Groupon has no intentions of creating a tangible product. They provide a service, not to mention that it's one of the oldest services known to the consumer world.
Zero Barriers to Entry
Groupon is the most well known online coupon company today. Groupon may forever be the most well known online coupon company and they will still be on the path to failure. Every campus in North America is starting to get "Groupon" type companies giving students the best deals. Every city in North America is starting to get "Groupon" companies giving them the best deals for bars and restaurants. Soon they will have to compete with every local niche coupon company. How will they fare against a golfing coupon company which is heavily networked with all the local golf courses? Or a bar and restaurant company which is friends with all the different bar owners in a city? The increase in competition is only going to drive the marketing expenses to higher levels. These marketing expenses are currently around 90% of their revenues. If they cut these marketing expenses, the competition will take over and they'll see a diminished brand recognition. If they keep these marketing expenses the competition will undercut their service fee (they currently take roughly %50 of the Groupon). It's a lose-lose scenario.
They currently have great brand recognition. Unfortunately for them they are now up against other brands in their industry with the likes of WagJag and DealFind looking to increase their market share. Anyone who is truly interested in getting the best deals will have all of these companies emailing them daily. In fact there are now services which consolidate all these companies into one singular email.
Lack of Repeat Business
Companies use Groupon in order to attract repeat business, and often operate at a loss through the coupons. They're now starting to realize that repeat business is rarely the case. Having your product or service on Groupon creates a sense of "cheapness." Would you rather get a $100 massage from the parlor which has been offered on Groupon for $40 or the one which has not? Personally, once the coupon is over and they're the same price, I'm going straight to the upscale parlor that did not appear on Groupon. This applies to all services. Just consult the old proverb of the barber who put up a sign which read "We fix $5 haircuts." Devaluing the price of your service, even if only for a short time, will resonate with your customers that you're not worth what the other service providers are.
This is something one could expect with a new tech company which has grown rapidly since inception. But not one with a market cap of 15.43B. Groupon got themselves in trouble with the SEC for misleading investors. As a result, they had to restate their financial results for the last three years to show more accurately their true revenue. Prior to this correction they were reporting all revenue which came through the company, including the share which belongs to their merchant partners, as their own revenue.
Inflated Subscriber Base
To become a groupon subscriber you need to type an address into their website. Any address. I do not own the email address email@example.com, but after my latest visit to the website, it is a subscriber to their growing base.
Groupon has risen 22% over the last week as a result of all the hype around Facebook. Their current Price to Book ratio is 11, while their EPS is -$1.08 as they have yet to turn a profit. They are riding the Facebook wave right now and it has presented a great short opportunity on the market. Beware, as you will be entering a popular position. They will be one of the most shorted stocks on the market as people start to see the complete lack of reasoning behind their most recent rally. This could lead to a short squeeze once they get low enough. But anything close to the price they're currently at and you can sit back and enjoy the best deal they've given you yet.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GRPN over the next 72 hours.