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 (NASDAQ:OPEN) initiated OpenTable Spotlight, and had success stealing Groupon's restaurant market share using similar deal tactics.
2. Groupon's major competitors, Google (NASDAQ:GOOG) and Amazon (NASDAQ: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.