Groupon Revisited

I never purchased shares in Groupon as it was obviously overvalued at first, and as the price fell I became more skeptical of the ability of anyone to predict future cash flows with any margin of safety.

The accounting troubles were unfortunate — I think this was a result of bad internal controls combined with extremely aggressive private market owners pushing to sell out to the public at high prices.

As I mentioned in my first post about Groupon’s competitive advantages, I still think it is very possible to have barriers to entry in this business, and to maintain high market share. People who claimed that the market was too commoditized turned out to be wrong in the end: so far, Groupon and LivingSocial have roughly maintained their market shares.

WSJ: “Groupon’s Growth Slows”:

Groupon has faced a series of hiccups since going public, including financial revisions and questions from regulators, as well as concerns that consumers are tiring of the daily discounted offers that it provides from merchants.

I think the last reason was the real downfall — not competitive pressure. I admitted the concept was faddish in my first post but clearly overestimated the sustainability of the online “group coupon” model in terms of popularity (Groupon, LivingSocial, Travelzoo, etc.).

I think it was originally a great idea — and it will continue to be a good product for certain businesses and consumers. But the incredible growth of the idea was short-lived. It turned out the be the “Peak of Inflated Expectations” in the Gartner Hype Cycle:

The idea itself became a fad among consumers (myself included) and as time went on people became either bored or sick of the idea. Small businesses that used the service also found out quickly that issuing a mass amount of hugely discounted coupons isn’t right for every type of business. It works for some, but not all.

At a price of $2.82, current enterprise value is around $750 million or $1.3 billion if you include the float from merchants payable. Will this price turn out to be cheap in hindsight? I still think it’s too hard to tell. But it very well might be if Groupon can right-size its business and reach the “Plateau of Productivity”. There is a certain level of volume that makes sense for this model, they just need to find it without losing too much money along the way.

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