In Defense Of Groupon's Andrew Mason

| About: Groupon, Inc. (GRPN)
This article is now exclusive for PRO subscribers.

Recently, CNBC declared Andrew Mason of Groupon (NASDAQ:GRPN) as the worst CEO of the 2012. He headlined an undistinguished list of underachievers, poor managers, and short-sighted men. This list also includes Steve Ballmer of Microsoft (NASDAQ:MSFT), Ron Johnson of J.C. Penney (NYSE:JCP), Mark Pincus of Zynga (NASDAQ:ZNGA), and Antonio Perez of Eastman Kodak (EKDKQ.PK) in that order. Honorable mentions also include Stephen Elop of Nokia (NYSE:NOK) and Daniel Hesse of Sprint Nextel (NYSE:S). All of these CEOs and their respective companies have had a very bad year. Steve Ballmer heard a giant thud when Windows 8 and the Surface hit the market. Stephen Elop can't seem to abate Nokia's slide in market share; more importantly, his and Nokia's fate are very closely tied to Steve Ballmer and Microsoft. I'm not sure why Daniel Hesse is still a CEO; Sprint Nextel has seen a precipitated decline in revenue, market share, and his Board recently overruled his attempted takeover of MetroPCS. Zynga seems to be imploding with layoffs, crashing revenue, exodus of talent, and a dramatic shift in strategy. Zynga leaders, including Mr. Pincus, completely misjudged the future of their market. At J.C. Penney, Ron Johnson tried to turn a 110-year-old discount retailer into a high-end department store; clearly, it didn't work. With Antonio Perez, the story is a little trickier as film is a dead medium, and he is stuck with a company that is unable to compete with Sony, Apple, and other device manufacturers that had a big head start. Now we come to Andrew Mason.

Generally, I think CNBC is crap. It's the Fox News of financial news. Generally, I also think that rankings and lists of the worst this and best whatever are catalysts for pointless discussions. However in this case, Herb Greenberg (the guy who came up with the list) makes some good points. I think Steve Ballmer is and has always been way over his head in leading Microsoft. Daniel Hesse really has not demonstrated a capacity to add value; in fact, since 2007 when he was hired as the CEO, Sprint's stock price has lost 80 percent of its value. Stephen Elop has been the CEO of Nokia for only two years but he seems to be manning the Titanic. But when it comes to Andrew Mason, I think Mr. Greenberg is being a bit unfair.

The main argument that Groupon haters make for why the company sucks is that the stock price has plunged 80 percent since its IPO last year. This is true. After a huge fanfare and hype, the stock traded at more than $31. Since then, we all know what's happened. The stock took a dive; the company had to restate earnings; it came under additional accounting scrutiny; revenue growth slowed, and Andrew Mason was nearly fired. That's a lot of bad stuff. However, I am going to try and defend Mr. Mason.

In regards to the accounting scandal, Groupon had admitted to having weak internal controls for conducting refunds. Apparently, their system just didn't do a good job of keeping track and issuing refunds. However, while accounting issues and concerns at publicly traded companies are never acceptable and those who demonstrate incompetence or negligence in this area should be fired immediately, Groupon was a very young company that grew far faster than anyone, including Andrew Mason, could have ever imagined. So while it is fair to argue that company leaders, including Mason, are not fit to lead, they were also in uncharted territory. You can also easily argue that they grew faster than their capacity - i.e. growing pains. So, while their accounting problems are not forgettable, they are forgivable.

In regards to revenue, what goes up must come down. No company can grow at an exponential rate forever. Yes, Groupon's growth has slowed dramatically, but so has the global economy. Don't forget that we're still in a global recession. More importantly, year-over-year revenue is still up more than 32 percent. As of December 19, 2012, the stock was trading at less than 1.2x sales. That isn't bad. For perspective sake, Amazon (NASDAQ:AMZN) is trading just above 2.0x sales.

Despite the tremendous rhetoric around Groupon, it still has a lot of good things going for it. First, it will likely be the last daily deal website standing. LivingSocial, Groupon's primary competitor, seems to be dying away, and Amazon no longer seems all that into daily deals anymore. More importantly, Groupon has about 79 percent of the daily deal traffic while LivingSocial only has about 8 percent. Second, less than half of all shoppers are aware of the group buying category. This means that as word spread and as competitor's die away, Groupon stands to grow. Third, Groupon's user base continues to grow at fairly good rate. From Q3 2011 to Q3 2012, Groupon's user base grew from about 29 million to nearly 40 million. The fourth and most important asset that Groupon has is its relationship with small businesses around the globe. This is not an easy asset to acquire and Groupon made that relationship stickier by launching Groupon Payments.

Not everything with Groupon has been rosy in terms of business strategy. Although I can be wrong in the long run, I believe that Groupon Goods is a mistake. Why would Groupon want to be involved in warehouse management, product sourcing, fulfillment, and other massive headaches that come along with being Amazon? I get there is fierce competition between Amazon and Groupon given Amazon's purchase of LivingSocial, but Groupon is winning the daily deal battle. It has done a good job capturing the market. So why add a low margin business to your high margin business and divide your attention that way? I can't answer that question.

I wasn't totally opposed to the idea of Andrew Mason being fired. He has gone out of his way to be quirky and goofy. These are not qualities I seek in a guy who is running a company that I am a shareholder in. There was also a prevailing sense that Andrew and his cohorts thought of themselves as being smarter than everyone else. I want a CEO who is clear, honest, and forthright. Andrew Mason did not always appear to have those qualities - at least to those of us looking in. With that said, I still don't think he was as bad as Steve Ballmer, Mark Pincus, Daniel Hess, or Stephen Elop. These guys had historic losses and brought confusion to their company's strategic path. I don't think Mr. Mason even belongs in the same conversation.

Daily deals or group buying as a category still has room in the retail landscape. It's an opportunity for small and large businesses to move massive volume in short order and for the consumer to benefit by business's desire to clear its shelves. This is a win-win. That's why this category isn't going anywhere soon. Remember that Amazon also had some serious growing pain in its early years; Amazon stock price had traded below $6. Groupon has a bright future. If Europe can get its act together and we can get out of this recession, why wouldn't Groupon resume its rapid growth rate? If you have a short-term investment horizon, Groupon isn't for you. However, if you can sit on your hands for the next two to three years, there is a good chance that Groupon will be back to its IPO levels.

Disclosure: I am long GRPN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.