Why Groupon Will Never Be Great Again

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GrouponThe Groupon (GRPN) craze was great while it lasted.

The daily deals purveyor has never been more popular. Groupon closed out 2011 with 33 million active customers across 47 different countries. Quarterly results posted on Wednesday night show a company that is growing quickly.

However, there are more than a few signs that "Groupon fatigue" is kicking in.

First, the good news. Groupon saw its quarterly revenue soar 194% to $506.5 million, well ahead of the $475.2 million that analysts were expecting. The adjusted loss of $0.02 a share was less than the $0.03-a-share profit that Wall Street was forecasting, but the adjusted figure actually includes a $0.07-a-share hit on international taxes paid in countries where it is now profitable. Yes, Groupon is an international play now, with 63% of its revenue trickling in from outside North America.

Operating income actually clocked in at a positive $15 million. More impressively, free cash flow soared 248% to $155.1 million.

This certainly doesn't seem like a company on the way out. How dare anyone accuse Groupon of peaking?

Well, let's get to the darker side of this growth story.

Group Off

Groupon conveniently left out its subscriber count from Wednesday's report. When it went public late last year, the dot-com speedster let investors know that it had 142.9 million subscribers but only 29.5 million cumulative buyers as of the end of September. In other words, only roughly one-fifth of those receiving Groupon's daily blasts were ever wooed into actually buying one of the company's local deals.

This time around, Groupon is letting us know that active customers are up 275% year over year to 33 million. It's an impressive number, but what do you think it means when the customer count is growing faster than revenue? Lower revenue per customer? Well, that's another metric found in November's S-1/A filing but not in Wednesday's 8-K.

If you're hungry for another big number that hints at something problematic, consider that gross billings soared 201% to $1.25 billion. This is the amount that Groupon charges customers for its deals after backing out any applicable taxes and refund estimates. The difference between gross billings and its reported revenue is what Groupon shells out to the 250,000 merchants offering city-specific deals on its website. Remember how revenue grew at a 194% clip? What do you think it means when gross billings are growing faster than revenue? Yes, Groupon is resorting to paying its merchants a bigger cut of the deals to keep them coming.

The 50/50 split that many assume takes place between Groupon and its lead-hungry merchants is a myth. Groupon's take is now closer to 40%. As distant silver medalist LivingSocial and even smaller rivals get more generous on their terms to win jaded merchants, Groupon will have little choice but to play along.

The Business Model Smells Funny

There's no shortage of horror stories from merchants who have experimented with the daily deals websites only to find that they attracted spendthrift one-time customers. There are also plenty of subscribers who have seen their pre-paid discount vouchers expire without being used. Maybe you didn't want that Brazilian wax after all. Maybe your wife wasn't impressed with the insinuation behind the pole-dancing classes voucher.

However, we still don't know if this will ever be worth it for Groupon. The company has accumulated a deficit of $676.6 million since launching less than four years ago. If the company were to curb expansion and scale back marketing costs, it would be pretty profitable, but what if this is a passing craze? Weren't radio stations and newspapers offering similar flash sales and discounted dining programs a few years earlier? Where did that get them?

With 632.8 million shares outstanding after November's IPO, Groupon went public with a market cap of nearly $13 billion at its $20 offering price.

Yes, it got the next laugh on Google (GOOG) after a reported deal to buy Groupon for $6 billion failed to materialize. But who will get the last laugh?

Facebook, restaurant reviews website Yelp, and dining reservations leader OpenTable (OPEN) have all bowed out of selling Groupon-like vouchers. They wouldn't be so quick to leave if there was potential in this niche.

Groupon's outlook for the current quarter is intriguing. The deal maker sees operating income of $15 million to $35 million, so there should be improvement there. However, the $510 million to $550 million in revenue that Groupon is targeting doesn't call for much of a sequential boost. We're looking at just 1% to 8% improvement over the fourth quarter it just wrapped up. Since Groupon's North American business is growing slower than its international operations, are we about to see Groupon's stateside business decline? At the low end of Groupon's guidance, that's probably what we will see.

Ouch!

Oh, and before bulls argue that sequential analysis isn't fair when pitting the holiday quarter against the seasonally lamentable first three months of the following year, it should be pointed out that revenue posted a 72% sequential burst during last year's freshman quarter.

Groupon isn't going away. Its debt-free balance sheet is flush with $1.1 billion in cash after the IPO and earlier financing rounds. As weaker players crumble -- and they will as consumers tire of handing over voucher printouts and mobile phones -- Groupon may appear to be the beneficiary.

Don't buy it. This is a harder model to pull off than it seems on paper and it may not be long before only merchants who need to deeply discount their food and spa services to attract customers will be participating. A year ago, Groupon shut down the social component where users could comment on deals. It was a great way to expose iffy merchants or question the advertised savings. Now Groupon limits the communication to questions that get answered.

What's Groupon hiding? You probably don't want to stick around to find out.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of OpenTable and Google. Motley Fool newsletter services have recommended buying shares of Google and OpenTable.

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14 Comments

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Wayne Bradshaw

Louis Vuitton Replica Handags usually was manufactured from China ,it is not authourized by louis vuitton .But they will come with the high quality that almost the same materials and handwork,So it is hard to distingush the Repilicas.

May 05 2012 at 11:58 PM Report abuse rate up rate down Reply
chelley62

It's hard for me to take this article seriously when dailyfinance.com is the same site posted an article that touted " why transfer bank day wouldn't work" (http://www.dailyfinance.com/2011/10/26/why-bank-transfer-day-wont-work/) and we now find there aren't going to be any fees for debit cards and these banks lost about 2 million customers as a result. All I hear about lately is how much money my friends are saving on Groupon. I haven't been there YET but plan on visiting it soon to see if they have any deals locally in my mid-size town.Time will tell.

February 13 2012 at 7:47 AM Report abuse rate up rate down Reply
Hue

continuously dragging HORSESHIT about Europe into the American TV with pre-mediated lying and allowed by US Regulatory's.

Yeah. Americans are Stupid and nieve PIGGS and weare333.,

3 million DEAD at least in NYC brought on by GREED, Sodomy and NOSE DUST.

Half of them at least have had nasal surgery - Ever wonder why America?

tHE sec HAS BECOME A FRONT for EVIL Man and EVIL Man goes NO Where.

February 11 2012 at 10:10 AM Report abuse rate up rate down Reply
1 reply to Hue's comment
mrfoxy39

Way to go PROFESSOR.THE WHITE COATS ARE COMING

February 12 2012 at 12:15 AM Report abuse rate up rate down Reply
Hue

RISE

UNITED STATES OCCUPIERS

Time to throw away the rocks that NYC financial PIGGS and SEC

HIDE UNDER

NYC GETS NUKED

It's a CORRUPT PIGGS HAVEN.

February 11 2012 at 10:01 AM Report abuse rate up rate down Reply
Hue

Sundays Sermon
Reverend JAA
Special Guest Speaker: Ezekiel Trinity
1/9/2012
“Thank U Reverend” says Ezekiel.
“They ALL know what to do in the Axis of EVIL (Wyoming, Montana & Idaho) and throughout America. But they would rather hold a weapon & point Satan’s anal trident at Christ’s animals; OUR wolves, their pups and MUTILATE them. The animals are here 4 us, and we have answered the door and greeted them with EVIL Man.
Legislators would rather ride the anal trident slowly and back and forth and up and down, until they scream with JOYOUS pleasure and ask Satan 4 more. In fact, across America, they know that spays, fixes or neutering the wild animals is the way to MANAGE numbers, but it’s best 2 leave them b. Lotz of Jobs 4 Jesus there 2. It’s done in the field. ALL states. And those animals that R here, stay here, as they deserve and have a right 2, NO LESS than us instead of EVIL Man GENOCIDE. U want 2 eat our wild animals; how bout
EATing their droppings instead
Satan digests it WELL and it’s TOPS on his menu. U will Enjoy it 2. Tastes like chicken 2 U.
U like cheese in Wisconsin and MURDERING Deer? Then U get Satan’s anal cheese with fudge & Packers.
Only Satan sneaks up on Baby harp Seals with a bat. STOP IT, COMPLETELY CANADA, says the Great Bear. U have no goalie that can defend your children against Satan.
Satan has American stuffers 4 U NRA. U recruit and use EVIL Man to distribute your poisoned wealth. U are a terrorist organization and MS-13 does not like company. U are headless like those in Mehico afew daze back.
It’s only UNEARTHLY WILL that sends the Hunter to do sATaN’s WoRk 4 A KILL And We all know what a hunter does alone in the woods with his gun; They ride that barrel with anell mustard up & down & up and down 4 lotz of fun.
Your License has EXPIRED in 2011, 201x, 201.
And THIS IS Y
because Satan SPAYS,FIXES & Neuters U
Tester, Riche, Simpson, Hunters, The NRA and alikes because
WE DO NOT WANT U or anything LIKE U EVER taking up Mother Earth’s space AGAIN.
It is U that sentences the Axis of EVIL, and it is U that sentences your children & it is U that brings the BEAST into America that stains and shames innocence and poisons the harmony of Earth. “


By: Reverend JAA, Your END TIME Specialist, 2011,201x,201, #1 PIGG DEnigraTor and #1 DenIgrator of PIGGS in the World. Reverend JAA Denigrations will continue until the British BP Pig is dead. Following a short coffee break, there will be a recap of the British Pig Greatest Internet Hits. You can write to the Reverend at: http://www.poisonedgulfanimalsinheaven.com & deadgulfseaanimalsinheaven@yahoo.com
Party of Christ – premonitions premonitions, which come 2 b. weare333@yahoo.com (Good, Bad and just plain UGLY). 2000 years ago we were in hell and had to work our way out.
We know what Satan does for kicks.
There is NOTHING wrong with being GOOD. WE STAND TALLEST like the Giant Trees ONCE stood.

February 11 2012 at 9:58 AM Report abuse rate up rate down Reply
1 reply to Hue's comment
mrfoxy39

WTF is he talking about? No coupons for him!!!!!!!!!!!!!!!!

February 12 2012 at 12:13 AM Report abuse rate up rate down Reply
GARRY

I wish they would go out of business. Then maybe I would stop getting so many un-slicited E-mails from them. I have never been to the site and get tons of e-mail. I will never go to the site.

February 10 2012 at 5:56 AM Report abuse rate up rate down Reply
Greg

I have a friend who tuck me out to lunch with a "great deal" from Groupon. There were so many strings attached that by the time the bill came, we would have been better off not even bothering with the darn coupon after al as the coupon wouldn't cover regularly offered specials at the restaurantl.

So I've never bothered with Groupon.

February 09 2012 at 5:29 PM Report abuse rate up rate down Reply
Eric Carr

I'm not sure that Groupon was ever great, at least not as a business concept. They were in a market with almost zero barriers to entry selling an undifferentiated product. The single driver here is their ability to reach customers who are valuable to the merchants.

However, unlike other "network effect" business models, coupon customers are not locked into one supplier (e.g. Windows users), and barriers of entry/exit for the customers is also zero (unlike, say, a cell phone provider, where a contract is in place). Once that's factored in, the only remaining avenue for success is Groupon's ability to keep its customers loyal and keep its merchants happy.

The data in the article above suggest that this is not happening, at least not from the merchants' perspective. If this also occurs with other deal aggregators (Plum District, Living Social), then this is a dying industry altogether
.

February 09 2012 at 4:46 PM Report abuse rate up rate down Reply
Brickhead

The US Markets start their rise
And it is not a Daarck surprise
So many now in the slammer
Justice smashes their skulls with Anvil and Hammer
America C’s how U stuff our trades and NOW
U get regulated and regulated and regulated
we we we we we we we we sez the TV commercial pig
Satan makes U go regular as U continue to sit and ride and ride on that anal trident with EXTRA anell mustard until U scream out in JOYOUS pleasure and ASK 4 more.
U GET MORE.
Satan DROPS HIS LOAD on U Wall Alley PIGGS of NYC
U WEAR his OVER COTE
Daarck Knight, SEC and FBI come to get what’s UNDER IT.
Satan **** 4 U PIGGS with his own POOPER SCOOPER.

February 09 2012 at 3:39 PM Report abuse -1 rate up rate down Reply
4 replies to Brickhead's comment