Learning From Groupon's Plunging Stock Price

| About: Groupon, Inc. (GRPN)

The collapse of Groupon's (NASDAQ:GRPN) stock price provides a good lesson of how the rules regarding business models haven't changed. The beleaguered stock has fallen by more than 80% since it first started trading on November 4, 2011.

Accounting issues aside, investors have long had a reason to be skeptical of Groupon's business model of selling coupons. Granted, Groupon found a new way to sell coupons by requiring a minimum number of consumers to participate in the deal, but at the end of the day, consumers are paying Groupon to get a discount at a local business. Newspapers have long distributed coupons and advertised promotions. Plus, there is no shortage of companies delivering coupons to consumers' mailboxes and email inboxes. Visiting a company's website, liking its page on Facebook or signing up for its newsletter can also provide discounts. In short, there are plenty of venues to find deals (and I haven't even mentioned Groupon-like competitors such as Living Social or websites such as RetailMeNot.com).

Successful growth companies find a way to differentiate themselves from the competition. Philip Fisher wrote about the importance of having a clear competitive advantage in his classic book, "Common Stocks and Uncommon Profits," originally published in 1958. It's no different in the technology and Internet arena. Successful companies both create new value for customers and erect tough barriers to entry, as this AAII Journal article explains. (Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are two good examples of companies that create value and have erected barriers to competition.)

In contrast, Groupon merely had a new idea for how to promote and distribute coupons. Its crowd-oriented deals attracted a lot of favorable press initially, but there has been backlash since. Although some businesses have had success using the service, others have complained that the offers only bring deal-seekers, as opposed to creating new repeat customers. There have also been reports about unhappy consumers who have found restaurants packed or otherwise had difficulty making use of the coupons. In other words, the amount of value being created is questionable.

A new business story is exciting, but as Groupon has showed, it is always important to step back and ask whether there is any real substance behind the hype. As the stock's price performance indicates in the case of Groupon, many investors have determined that the answer is "no."

Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: AAII's Stock Superstars Report newsletter holds a position in Apple.