Groupon probably won't make it another year. A great idea at inception, the company lacks a sustainable competitive advantage and has a slim (if any) hope for a profit margin. Here are 5 reasons why Groupon likely will not be a going concern within one year:
1. The collective bargain model has limited barriers to entry. New entrants with large mailing lists can just as easily send out a mass-mail coupon as Groupon can. Evidence of this began years ago when OpenTable (OPEN) initiated OpenTable Spotlight, and had success stealing Groupon's restaurant market share using similar deal tactics.
2. Groupon's major competitors, Google (GOOG) and Amazon (AMZN), are companies with diverse business portfolios and this is just one of their many investments funded by deep pockets - Groupon is a pure play with no other financial backing to support potential cash shortfalls.
3. Customers (business who use Groupons) have a high rate of attrition to competitors. Google offers a better cut of the end-user revenues and, perhaps more importantly, disburses the money back to the businesses more quickly - because they have the working capital to do so (see point #2). Just ask any business owner who has used this service.
4. Low stock price = low morale = high employee turnover. Groupon's core competency is grass-roots consumer acquisition. That means their greatest assets are its people - and people won't want to stick around as the share price continues to fall (and hence, their compensation). Now, I realize this is a circular argument (because I'm assuming I'm right about the share price falling), but with the lock-up expiring and a lack of investor confidence (due to issues with internal controls and, frankly, some sketchy accounting), one would think the downward pressure might continue.
5. Eric Lefkofsky has a past with aggressive accounting and ultimate business failures. He acquired Brandon Apparel, athletic-apparel maker, in 1994. At first, the company, like Groupon, saw fast growth, with revenue rising from $2 million to $20 million. Shortly after, however, the company went bankrupt: "We over-leveraged the company and it eventually crumbled under the weight of that debt," Lefkofsky wrote. In 1999, Lefkofsky founded Starbelly, a relative first-mover B2B service provider. In early 2000, Starbelly sold itself to another company called Ha-Lo Industries for $240 million, much of which went to him. Not long after that transaction, Ha-Lo declared bankruptcy. Shareholders and others blamed the Starbelly deal, and a series of lawsuits ensued. His next company, InterWorkings, also has had some red flags, including a racketeering lawsuit. This track record demonstrates a pattern: rapid revenue growth accompanied by big losses, a penchant to sell stock early on, and lawsuits filed by investors, lenders or customers who feel they have been wronged.
Groupon is probably kicking itself for turning down Google's $6 billion dollar bid a few years back. Now it's up to the shareholders to decide how fast the clock is ticking.
Disclosure: I am long GOOG.