Group Buying Is a Revolution, Not a Bubble

Includes: OPEN, PCLN, TZOO
by: Leigh Drogen

They’re all coming out of the woodwork now. From Priceline (NASDAQ:PCLN), to Travelzoo (NASDAQ:TZOO), OpenTable (NASDAQ:OPEN), and now even Facebook, the group buying revolution is on like donkeykong. Everyone wants a piece, and they will all get one. The list of Groupon clones is long and distinguished, there is even an aggregator of all these daily e-mails, Yipit.

Some of you luddites may confuse this for a fad.

This is a revolution in the way local businesses advertise and people consume. The buzz phrase is collaborative consumption, get used to hearing it. This is the underlying reason that this business model works. Sure, it’s nice to get served a discount to a nice restaurant, but this is so much more. I forward these things to my friends during the work day, we have an e-mail chain, and then we pick one and eat dinner together. It’s about social, it’s about doing things together, it’s about connecting people.

The valuations for these companies are sky high, as they should be. This is a new industry, one where many of these companies are cash flow positive from an extremely early age, have little overhead, and a huge chance to grow. No one has any clue in the world how big this industry is going to be, you can’t model it, impossible. What does all this add up to? High valuation multiples and huge price momentum.

There will be failures in this space for sure, like any other. Hot money is being thrown around by venture capitalists, some will get burned for being reckless. Certain established companies will step way outside of their business models and attempt to do this, and some will fail. There will be consolidation within the industry, after all sales teams can be integrated rather easily, it’s the sales infrastructure that is worth the most.

The possibilities internationally are enormous. Groupon is smart and is partnering over in China. The Chinese do not have a consumer society, they don’t buy things like we do, they don’t go shopping at the mall on the weekends, it’s just not the way that culture works. If this model of consumerism takes off, it could completely change the way we think about how people buy certain products and services over in Asia. I hope it does, our consumer society of waste here in the west is disgusting. As with any other vertical where a country does not have any existing infrastructure, there is little infrastructure in the idea of consumerism over there, allowing collaborative consumption to take over right from the get go.

As an investing and trading theme this should be right at the top of your list. If I were you, I’d be reading through a hell of a lot of 10Qs this quarter looking for companies that are building big businesses here. The analysts will be waaaaaay behind the curve when it comes to identifying which companies will be doing so. This provides the opportunity for huge earnings beats the next few quarters as companies shuffle their business.

What creates price momentum?

When the street is clueless as to why a company is changing and blowing away expectations. Be in front of that and cash in.

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