5 Reasons I'm Not Buying Groupon
Nov 7th 2011 9:49PM
Updated Nov 7th 2011 9:50PM
Breathe. Everyone just breathe. The Groupon (NAS: GRPN) IPO went off without a hitch as nearly 50 million shares moved on the first day of trading. The end result was no LinkedIn (NYS: LNKD) , which doubled on its first day of trading, but shareholders who were able to snag shares at the list price of $20 are nearly 31% happier and richer than they were the day before.
But does this mean investors should blindly toss their hard-earned money at this long-awaited IPO? I'd say not so fast. Today's move higher may have silenced some critics, but as the resident curmudgeon and skeptic at The Motley Fool, I'm going to offer up five reasons I'm not touching this too-hot-to-handle IPO.
Limited barrier to entry
That's the problem with being the first company to successfully launch a new platform -- eventually, everyone will try to copy it. Groupon currently owns about half of the North American market share for "daily deal" services, with LivingSocial coming in a distant second at 25% market share. According to Yipit, a website that aggregates the daily-deal data from these websites, more than 300 daily-deal sites have popped up in 2011 alone. I can only assume that with limited barriers to entry in place and only simple technology needed to connect small businesses to consumers, Groupon's dominance will slowly be chipped away by this smaller, but quickly growing, minority. Then again, with larger cash-rich players like Google (NAS: GOOG) and Amazon.com (NAS: AMZN) sitting out there, the competition just may wind up coming from a household name. Either way, the deck is heavily stacked against Groupon.
Little consumer loyalty
One month ago, Groupon announced a new incentive called Groupon rewards, which the company intends to use as a lure to keep members loyal to its site. It's a great idea on the surface, but it does little to solve consumers' fickle spending habits. I, for one, prefer Orbitz when shopping for a vacation package, but I'd just as soon toss the company overboard if I could save $20 by booking on Expedia. Although I don't use daily-deal services, I can only imagine that consumers looking for a deal couldn't care less where that deal comes from as long as it serves their best interests. With few incentives to stay loyal, Groupon's revenue stream could be vulnerable to wild swings.
It's losing money
Let's remember that this is 2011, not 2001, and the stock market (generally) only rewards companies that can turn a profit. Groupon, based on its third-quarter results released two weeks ago, has now lost money in six consecutive quarters. There is something to be said for the company's impressive revenue growth, which has ballooned from $4 million to $430 million in just two years. But there's also something sad about a company that can grow revenue by a hundredfold and is still unable to turn a profit. Although its third-quarter loss was marginal relative to the $554 million in cumulative losses over the previous three quarters, it shows that Groupon's spending habits could very easily get this company and its shareholders in trouble. With quarter-over-quarter revenue growth drastically slowing, that sends a large enough signal for me to stay away.
There's no longevity
Perhaps an even greater risk for Groupon than the 300-plus companies playing copycat is the risk that small businesses could get fed up with the current revenue-sharing model. The way things are currently set up, Groupon shares in the revenue brought in through its daily-deal offerings, while many small businesses wind up with little or no profit because of the revenue sharing or the nature of the discount being offered. There's nearly nothing that would prevent small businesses from eventually connecting directly to consumers and cutting Groupon out of the loop completely. Groupon's business model seems viable now, but I'm not so certain it will be successful five years from now.
The IPO market stinks
Don't let Friday's gain in Groupon fool you. The IPO market has been an unforgiving beast this year, and there's not much reason to think it will change anytime soon. For the year, a vast majority of the companies that have launched their IPOs are trading below their initial closing price, with some -- including Renren (NYS: RENN) , E-Commerce China Dangdang (NAS: DANG) , and Solazyme (NAS: SZYM) -- down in excess of 50% since their debut. With volatility rising, investors' appetite for risk is falling, and unproven IPOs that have, as of yet, been unable to turn a profit are going to be first on the chopping block.
Just because something is the flavor of the month now, that doesn't mean it belongs in your portfolio. I fully intend to slap an underperform rating on Groupon in my Motley Fool CAPS account and may even consider going short the stock in the coming weeks if the price moves inexplicably higher than it is now.
What's your take on Groupon? Is this stock another flash in the pan, or does it have the tools it needs to pump out significant profits for its shareholders? Share your thoughts in the comments section below and consider grabbing yourself a free copy of our "Hottest IPO in 2011."
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Google and Solazyme. Motley Fool newsletter services have recommended buying shares of Google and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on the lookout for a good deal.
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