http://www.theatlantic.com/technology/archive/2011/08/the-fall-of-groupon-is-the-daily-deals-site-running-out-of-cash/243863/
http://chicago.gopride.com/blogs/blog.cfm?blog=609
Math just won over hype. Shame on the analysts. Like any company, Groupon has to spend money to grow the business. However, the problems facing Groupon are numerous and out of the company’s ability to resolve.
As companies grow, op ex grows as well. However, Groupon’s revenue is being outpaced by its growing op ex. Simple math. In order for any company to survive, more money must come into the company then is going out of the company.
Groupon’s business model is a cash flow model. Groupon is a coupon business. Groupon may be doing business over the Internet but that does not make it an instant winner. This is beginning to look like the 2001 through 2004 Internet meltdown when investors threw money at companies by when they had the Internet associated with them.
Back then the story being promoted by brokers then was that eyeballs and clicks meant interest and implied revenue opportunity. Companies did not even have to generate revenue. Companies’ costs were out of control. However, analysts defended these Internet companies by saying the companies had to grow to achieve market scale. Unfortunately, that translated into costs growing faster than revenue. The result was the total collapse of these Internet companies.
Eventually all companies have to generate revenue to justify their valuations and stock prices.
I fear Groupon is telling investors the same story. They need cash to grow. Costs will outgrow revenue but at some point the company will reach a marketshare that will force competitors out of the marketplace; rendering it cashflow positive and positive revenue growth. Bunk.
Groupon is forgetting to mention that none of its customers are sticky and that many consumers only use them once. Groupon is facing competition from other national daily deal sites and even local daily deal sites. The competition is growing.
Competitors are reducing their share of the coupon value to keep the customers and that means Groupon has to do the same thing.
The barrier to entry into this business is LOW. Hence, that means competitors are coming out of the woodwork.
Local players can have a devastating effect on Groupon.
I like the company’s business model. However, the whole notion that this company can sustain a multi-billion dollar or even half a billion dollar valuation is nonsense. The company’s marketshare is eroding now.
Groupon can run a nice and small cash flow business. Maybe the only winners in the IPO are the brokers.
Penny savers are tough businesses to run but they do generate a nice income for their owners.