Tuesday, November 22, 2011


Groupon (GRPN) is a company that recently held its IPO (initial public offering) where it went public and attempted to squeeze in its fundraising in before the equity markets closed.  Other firms like LinkedIn (LNKD) and Pandora (P) all paved the way for the final scam which is eerily similar to the 2000 Tech Bubble days.

I've felt that many of these firms were not quite worth their initial stock prices, but for me, Groupon is among the worst of the bunch.

Why would I doubt the merits of this company?  I'll list a few below;

The GRPN business model is easy to replicate.  In fact, LivingSocial, is a player in the space that has been operating globally since 2009.  Unfortunately for GRPN, if I had a list of several thousand email addresses, I too could easily go into this business.

The company took in $1.3 Billion in sales and lost almost $700 million.  GRPN has about $250 million in cash on it's balance sheet.  The argument is that GRPN needed to raise cash so it could scale up its business, I would suggest that it needed to stay put and make its business profitable before taking investor money.

It seems that it isn't only Groupon that is unprofitable.  Essentially Groupon is used by many retailers as a loss leader in an attempt to get people in the door.  The pitch is simply once they get in the door and try your product, they'll become clients.  In the case I included below we find that if the retailer or small business survives the encounter with Groupon, they probably won't be inclined to sign up again.

London Baker's Experience With Groupon Leaves Bad Taste In Mouth

The baker in the story was overwhelmed by the purchases of 75% off coupons for her products.  In fact, the baker priced their product in such a way that she lost about $3 per dozen cupcakes she sold.  In addition, she had to keep staff working overtime and ultimately lost $20,000 in the experiment with online coupons.

As we evaluate her experience, we must conclude that the baker made a few bad decisions.  So let's not "sugar coat" this.  She obviously didn't understand the demand that the coupon would have.  She obviously didn't price the coupon correctly, and she didn't put a cap on the number that could be sold.  All of these are absolutely correct, and frankly this is in line with what I see from many small retailers, they simply don't understand business and risk mitigation.  This is why so many fail and so many sign up for long term leases at rates that kill their business before they even start.

With all of those items noted, we still need to recognized that the Groupon sales person also is at fault.  Why didn't they put a cap on the sale for their client's first experience?  Why didn't they encourage the client to price their sale appropriately?

Ultimately, Groupon will lose a potential repeat customer because the baker took a bath AND the story hit the national and world media they will probably also lose potential customers.

Look, as a business owner I have always distrusted "marketing" because it is fuzzy and often it isn't measurable.  I do not hate the idea of email coupons, in fact, I have bought a few before (I absolutely hate the rules and conditions they place on them).  In fact, I think that Groupon's business could be a powerful tool for a small business owners to make a quick name for themselves and build a business.  The trouble I have with Groupon is simply that it isn't an "internet company" and doesn't deserve valuations that are sky high and neither do firms like Linked In that ARE internet businesses.  Valuation is important and we've seen that crazy valuations often result in heartaches.

While there is not much data here in about 20 days of trading, the chart looks like it will break through the lowest point it has had in its short trading history.  In fact, as I am writing, it has fallen through $22.72 which I identified as support.  I can't even identify any support below this level, so unless we get back up on the close, I think it is a stock you can short with impunity


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/